In many industries, the balance of power has dramatically shifted from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price.
In many industries the balance of power has dramatically shifted from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price.
The shift has come about for various reasons, any or all of which may be in play in a given industry. In some cases suppliers have eliminated their competitors by driving down costs or developing disruptive technologies. In others, fast-growing demand for inputs has outstripped supply to such a degree that suppliers have been able to charge what they want. In still others, buyers have consolidated demand and forced suppliers’ prices down so far that many suppliers exited the market, giving the remaining few more clout.
The ability to negotiate with suppliers is a major differentiator in Procurement. The supplier landscape is changing: suppliers now have more leverage than buyers in a number of industries due to consolidation, a rise in demand for certain categories of goods and services, and other factors. So the mindset that the buying business has all the leverage isn’t always borne out in today’s landscape. Procurement is about lowering costs. But you can find suppliers squeezing you from a price perspective if you don’t have easy alternatives to go to – which not only puts your company at risk, it lowers your value as a contributor to that company.
In many industries, the balance of power has dramatically shifted from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price.pliers exited the market, giving the remaining few more clout.
If you haven’t been in a similar situation before, or if you aren’t in one now, it’s likely that you will be at some point in your Procurement career. Which is why we found this great new Harvard Business Review (HBR) feature so useful. Titled, “How to Negotiate with Powerful Suppliers,” it delves into a variety of strategies for how to navigate negotiation scenarios where the supplier has more power than the buyer. It’s chock full of good advice for Procurement professionals looking to provide extra value and make their companies more competitive.
The Harvard Business Review breaks their approach into four main strategies, ordered from low-risk to high-risk, as a step-by-step guide you can use when dealing with powerful suppliers in negotiations.
Strategy one: Bring New Value to your supplier
According to HBR, this is the first step you can take to challenge a power imbalance between supplier and buyer. If you’re dealing with a supplier that’s set to hike prices, think about offering them new value. Even large, powerful suppliers might jump at the chance to expand alongside your company into new markets, or to lock in a long-term contract, in exchange for a discount.
One example could be helping them saving money as -- Aaron Schwartz, Modify Watchestells Inc.“Treating suppliers like is critical to a company's start-up's success. As much as possible, figure out how you can work with your suppliers to make their lives better, whether saving them money from their vendors or saving them time with your order. By understanding their business model, you can make orders in an efficient manner, which should lower costs for everyone.”
Strategy two: Change How you buy
Working in a creative and collaborative fashion with internal stakeholders across a company, Procurement can extract value from monopolistic suppliers by changing their patterns of demand. HBR outlines how companies can consolidate their spend internally across business units – something that’s good practice to do anyway – or, if size is a consideration, form a buying group with other players in their industry to increase their leverage at the negotiating table with suppliers. Buyers can also take diverse areas of spend that they have “bundled” with one supplier and break them apart to negotiate separately for different goods or services where the supplier may not hold a monopoly. They can also draw down spend in a certain category – or even threaten to, which might cause a supplier to rethink pricing.
Richard Lorenzen, Lorenzen Capitaladvice us to Want It the Least, “In most negotiations, the better deal will go to the person who wants it the least...or more specifically, appears to want it the least. Have backup suppliers ready in case of a deadlock. This gives you a peace of mind that will allow you to come across as more confident in any negotiation. Don't be afraid to walk away.”
Strategy three: Create a New Supplier
If the previous suggestions aren’t feasible, HBR offers some more radical and potentially disruptive workarounds that challenge Procurement’s often staid image. They offer the possibility that, in a category with very few, very powerful suppliers, it may make the most sense to create a new supplier completely – even if it means changing your business model or threatening your relationships with existing suppliers. This could mean enticing an adjacent supplier to get in the fray – for example encouraging a European supplier to enter the North American market for a certain product. It could also mean vertically integrating and bringing online new assets and capabilities – possibly as part of a partnership with an established player – to circumvent the need for a supplier in the first place. The latter is a tricky proposition, as you’d need to establish the business viability of vertical integration, but it’s an option.
DC Fawcett, Paramount Digital Publishingasks us to Quote Multiple Suppliers, “My best tip for negotiating with a supplier is to always get the service quoted by at least three other suppliers. I let the supplier know that I am getting quotes and will go with the best one available. This creates some competitive pricing.”
Strategy four: Play Hardball
HBR outlines, as a last resort, a Procurement strategy that’s not for the faint of heart: dealing with powerful suppliers who won’t budge by playing hardball. While it’s a risky strategy that’s worth broaching only if you can’t find a more creative solution, playing hardball has been known to be effective. Whether it’s cancelling all your orders, pursuing legal remedies, or threatening to bring in authorities to investigate monopolistic behavior, hardball options are worth considering when a supplier hikes prices and every other strategy fails.
Going for a negotiation keeping these strategies in mind with monopoly suppliers will always be difficult, but by having a clear objective for the negotiation, clarity on the levers you have available and an understanding of the psychology of the supplier and your relationship with them, you will have a better chance of achieving the most valuable deal possible.