The negotiation process for expiring manufacturer vendor contracts often poses unique challenges. For example, those that have an existing relationship with the incumbent supplier need that relationship to remain constructive, especially since it will be ongoing once the contract is signed. When negotiating topics like price, this can prove particularly difficult.
Although issues of this type are seen at smaller plants, where vendor contract negotiations often fall outside of a manager’s primary responsibilities, even large manufacturers with dedicated purchasing teams tend to run into challenges. A standalone sourcing department will have limited insight on how the dynamics of niche markets and the value of a manufacturer’s business should be factored into the negotiations.
Consider Your Options
Manufacturing has always been – and will always be – a relationship business. While strong vendor relationships are critical, manufacturers also need the ability to step back and assess their suppliers’ motivations. After all, the top priority for each party is its own bottom line.
Over time, we find that incumbent relationships tend to become overvalued. This is understandable when service levels are solid and communication is good. Nonetheless, manufacturers unwilling to consider alternative suppliers risk missing advancements that could benefit their owners or shareholders. In dynamic category areas like chemicals, resins, electronics, and packaging, an assessment by an independent third party with expertise in the area is too valuable to forgo.
The Benefits of Open Communication
When digesting a stack of presentations from prospective suppliers, most companies lack the industry-wide exposure necessary to validate vendor claims, particularly in emerging technology areas. An experienced, neutral outside party can help cut through the clutter, navigating the “sales-speak” to ask questions that shed light on the features that have proven relevant to the marketplace.
There are best practices that third-party firms can help manufacturers apply to this process. For example, it is a best practice to keep the communication lines open and free between the company and the vendors competing for the business. This ensures that the communication between these two parties does not get scrambled by going through a third party. Obviously, vendors prefer this approach since it gives them the ability to best position their offerings. It is also best for the manufacturer as the relationships with the selected vendor (and usually the other competitors) will be ongoing once the selection process is over.
There are signs that a request for quotation or proposal process may not be running as smoothly as it should. For example, if suppliers begin to remove themselves from the exercise it could indicate that something needs to be addressed that may result in limiting a manufacturer’s choices. It is usually the goal of every company in this situation to get a complete view of the industry landscape and to select the best fit. In an effective process, it should be possible to remove supplier names from the presentations and review them solely on the merits of quality, delivery, technology, pricing, etc.
Since neutrality and expert facilitation are key components to a successful bid process, a good partner to assist in this process should place each contender in the position to put their best foot forward in a transparent manner. As the manufacturer either begins or extends a long-term commitment, the in-house procurement manager can then take the reins on the relationship without any baggage from the negotiations.