Small Business Guide to Supplier Negotiations
A Guide to Negotiating When You Don't Have Much Leverage
Small business owners and small business supply chain managers sometimes feel as if they have no leverage when it comes to negotiating with suppliers. Many suppliers may be much larger than their small business customers and those small businesses might wonder if they have any say at all when it comes to pricing, quality, and on-time delivery.
But small business owners can work with their suppliers in order to drive deliverables that are important to their company.
Size Does Matter
Without a doubt, size matters. If you are a small business and your supplier is a contract manufacturer, it might typically make millions of units in every production run. And if you, madam small business, only need ten thousand units – you are in danger of getting lost in the shuffle.
However, you can work with that supplier to establish a partnership that works for the both of you. The first thing you’ll probably need to understand is that large contract manufacturers are probably planning their capacity utilization months in advance. So you might have to wait.
Do you have the time to do that?
Forecasting can help you get most of the way there. And lead time management should be able to finish the journey.
In order to provide forecasts that work for your suppliers, you need to work with your customers. By aligning your customer’s demand with your supplier’s lead times and capacity – you can optimize your supply chain.
Don’t expect to reach out to a supplier and ask for the delivery of an order in six weeks, if their production capacity is full for the next three months. Start with your supplier and work forward through your supply chain.
How long will it take your supplier to deliver what you are forecasting (i.e. what you think will be what you need)?
If that’s three months, then go to your customers and get their demand over that horizon. When you have a firm commitment from your customer (within the lead times throughout your supply chain), you can place an order with your supplier.
Your suppliers – especially the larger ones – will appreciate that you have planned ahead and can fit into a slot that meets their available capacity.
If you need to negotiate pricing with a supplier and you don’t have the leverage you need to demand price reductions, you can always use transparency.
Your small business, your suppliers and your customers are all trying to survive in whatever dog-eat-dog industry you find yourself in. That being said, your small business, your suppliers and your customers are generally reasonable human beings who see the need for each of you to survive to keep the others alive.
And that’s how transparency can help. If you’re buying a part from your supplier for $10 and you sell that part (either as-is or incorporated into another part) for $12, you have a $2 margin to play with. You get to do all kinds of fun things with that $2, like pay your bills, pay your employees and, with any luck, pay yourself.
But if your supplier tells you it’s time for a price increase and your customer comes to you tells you that they need a price decrease – well, your $2 just got smaller.
Enter transparency. Show your suppliers what you’re earning off each part. Work with them on cost-saving measures (forecasting helps, so they can optimize production and raw material purchases) and they’ll work with you to keep your pricing down, and perhaps lower it.
At the same time, your customers may not realize the tight margins that you’re working with, so showing them your costs may be a good way to help ward off price reductions.
Of course, if you’re able to save money with your suppliers and are able to pass along those savings to your customers, you might be setting yourself up for future business from those customers.
Even if you have a comfortable and optimized relationship with your suppliers, it’s a good idea to launch a sourcing initiative every 3-5 years. Sourcing is supply chain speak for comparison shopping.
Survey the supplier landscape and offer your incumbent suppliers and potential suppliers the opportunity to quote on your existing products.
Sourcing projects let your incumbent suppliers know that you’re not only looking for cost optimizations, but also any innovations that might improve quality, on-time delivery, and inventory performance.
By using forecasts, transparency, and sourcing – you can pull different negotiation levers to work in partnership with your suppliers.