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Implementing an Enhanced Supplier Negotiation Process

Problem
Faced with the need to cut costs, increase product innovation, and improve overall responsiveness to customer demands, a large manufacturing company undertook a strategic sourcing initiative aimed at consolidating its supply base, creating cross-divisional commodity teams, putting global contracts in place with key suppliers, and instituting standard metrics against which to measure supplier performance.

However, the company soon encountered several challenges.  Commodity managers and buyers complained of having no leverage in negotiations, because engineers had designed specific supplier technologies or components into product specs.  Engineers and other end-users complained that sourcing and materials management teams were myopically focused on price, and often damaged relationships with critical suppliers by negotiating too aggressively.   Suppliers played one division off against another.  And to the company lacked a systematic way to evaluate whether an agreement with a supplier was competitive relative to market alternatives 

Solution
Vantage, together with a core team of sourcing executives and business unit leaders, engaged in a rapid diagnostic analysis to better understand the barriers to implementing new negotiation approaches and capabilities.  Analysis highlighted the need to formally define a set of critical negotiation activities:  setting clearly defined goals; conducting market research to help inform negotiation strategy development; engaging in mid-course deal reviews with cross-functional executive teams; and conducting formal transitions from negotiating teams to teams responsible for working with suppliers once contracts were signed.

To embed common practices, tools, and skills  across the organization, negotiation training and coaching workshops were conducted to equip all individuals involved in interacting with suppliers with the skills to effectively prepare for and conduct contract negotiations, as well as ongoing (often informal) negotiations over design changes, individual purchase orders, and scope changes.

The Vantage-led team also designed and implemented an electronic workspace with interactive negotiation job aids, dashboards to enable coordination of negotiation activities across teams and divisions, and a knowledge repository of information about the company’s suppliers and lessons learned across negotiations.  A small team of negotiation black belts were trained to serve as coaches and change agents to drive continuous improvement across the organization.

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Results
Within a year, the company reported not only significant cost savings and better contract terms, but also improved relationships with key suppliers, and improved relationships between the procurement and materials management, and product divisions.  Notable results included:

  • Overall supply chain cost reduction of 10%
  • Average annual price reductions of 10-15%
  • Improved contract terms and reduced variability across contracts (e.g., larger windows for canceling orders at zero liability; extended warranty coverage and greater reimbursement provisions; and the acceptance of exclusivity provisions by suppliers)
  • Identification and/or development of alternate sources for several key commodities

 

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