Mistakes to avoid when negotiating with suppliers.

• Author: Birdwell, Brad
• Position: Cost Control

It is possible to reach pricing and terms that are mutually beneficial and financially attractive to both parties. But this type of collaboration is not intuitive; it requires a strong foundation in principled negotiations.

It can be challenging to assess the quality of pricing and terms for contracts and purchases that require the approval of the financial executive. When considering "Did we get a good deal?" the answer is invariably "Yes." The follow-up question, "How do we know?" often gets a less certain reply.

Employees at all levels of a company's business units strive to be good stewards of its resources, but are rarely hired for their expertise in vendor negotiations. And few in the C-suite get involved in all but the most strategic vendor deals.

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Fundamentally, a good deal includes transparency into vendor pricing practices. With profit maximization the primary responsibility of the sales team, establishing strong agreements requires an understanding of the tools used by suppliers to increase margins.

When handled correctly, it is possible to reach pricing and terms that are mutually beneficial and financially attractive to both parties. But this type of collaboration is not intuitive; it requires a strong foundation in principled negotiations.

Does the deal favor the vendor or purchaser? There are five warning signs a deal might be better for the vendor's bottom line than for the purchaser:

(1) The Team Requested a 'Budgetary Quote'

Before any negotiations begin, managers often call on vendors for "something to put in the budget," The project is not yet approved, and the pricing from the vendor will not be heavily discounted at this time. As soon as that phone call occurs, significant leverage has been lost

The vendor has established a starting point for the negotiation, and will believe it knows how much the purchaser has budgeted. Even if the deal is subsequently sent for other bids, expectations for what a good deal looks like may be based on the original quote.

The mistake is even more costly if the vendor is a reseller, as it will likely "register the deal" with the manufacturer. This locks in the vendor's right to special discounts to which other resellers will not subsequently have access, allowing the reseller to build additional margin into the price while still providing a discount that its competitors cannot match.

This is not to say a purchase team should never contact suppliers for budget...