Negotiating Contracts With Suppliers

Negotiating the right contract with your suppliers does not necessarily mean getting what you want at the lowest possible price. You might want to negotiate other factors such as delivery times, payment terms or quality of goods.

Most business owners would call a good contract a contract that meets all of their requirements. But there are a whole host of other factors to consider, such as whether you want to do business with a particular vendor again.

Both parties should enter into a negotiation feeling comfortable and satisfied with the agreement. Negotiations may not be successful if one party feels stuck.

This guide outlines how to negotiate a contract, including setting goals, understanding your supplier’s position, and using appropriate tactics.

Setting goals when negotiating with suppliers

There are a range of key considerations you should keep in mind when setting goals in purchase negotiations. Among these, we find in particular:

  • the price
  • value for money
  • the delivery
  • payment terms
  • after-sales service and maintenance arrangements
  • the quality
  • costs related to the lifetime of a product or service
  • whether or not the product is essential to your business

Before you start trading, make a list of the factors that are most important to you. Decide what you are ready to compromise on and what you are not ready to compromise on.

For example, if you’re ordering supplies in bulk, you might want to find a supplier who will give you a discount. Or if you’re investing in complex computer software, you might want to make sure training is provided as part of the contract.

The key is to establish your preferred outcome. But stay realistic; if you are not ready to compromise, the negotiations will not go far. You should also consider what offer the supplier is likely to make and how you will respond.

Remember that if you want to do more business with the supplier in the future, you should aim to reach a contract that will satisfy both parties.

While it’s important to get the best contract possible in the short term, a good relationship can even help you get cheaper prices or other perquisites, such as priority delivery, in the future. Don’t underestimate the importance of good relationships.

Understanding your supplier

By researching a potential supplier, you can learn the value your business represents to them. Your bargaining power increases in direct proportion to your potential supplier’s need to do business with your company.

If the supplier operates a quasi-monopoly, it is likely to have the upper hand because:

  • he already has enough contracts
  • you have only a few sources to make your choice

However, if the supplier has multiple competitors, or is new to a particular market, you will be in a much better position.

Also, the supplier could already offer good contracts in order to increase its market share.

Otherwise, a supplier may need your business to dispose of old inventory or to fill excess production capacity.

Try to find out as much as possible about the condition of his order book.

If you are the main customer of a small supplier, your advantage in negotiations could be considerable. But be careful, if you push too hard, you could lose his benevolence, which could hurt the service you get. There is also the risk that they will drop the product you need, or even go bankrupt.

Try to identify key personnel in the supplier’s business with whom to negotiate. There is no point in succeeding in obtaining concessions from a young staff member who does not have the power to grant them.

Negotiating at the right time can be an important strategic tool. For example, a salesperson may be required to meet a monthly sales quota.

Developing a negotiation strategy

It is essential to plan your strategy in writing before entering into negotiations. This will help you set clear goals and establish boundaries as well as when to step down.

Start by setting your priorities, such as low price, goods with high specifications, or a particular delivery schedule.

Think about the different offers the supplier might make and what you are willing to concede or compromises you are willing to make. For example, you might decide that you will only pay full price in exchange for a quick turnaround.

Write down your negotiating strengths and how you could use them to get the concessions you need. Consider ways to defend the weaker positions in your argument and counter the vendor’s main strengths.

Pulling together the negotiation team

Once you have determined your strategy, it is also essential to train your negotiating team appropriately. Make sure she has the skills in all the necessary areas.

You will need to ensure that you match the seniority of the vendor representatives. For example, you should not send a young account manager to negotiate with his managing director.

Make sure every team member knows your trading strategy. The more confident they seem about what they want, the more likely they will get it.

Leading negotiations

Before starting negotiations, state the aspects of the contract that you are satisfied with and the points that you want to discuss. Ask the supplier to do the same.

Make sure both parties are happy with what is being negotiated. Get the supplier to re-state any discounts offered along with payment terms. Keep this key information handy.

If you have enough bargaining power, insist on using your own terms and conditions of purchase.

Do not indicate too early in the negotiations that there are things on which you are ready to make concessions or compromises. Try to give the impression that you are approaching the negotiations in a positive way without revealing your position.

For large or large purchases, suggest putting the main points of the contract in writing. For example, when buying company cars, they might list your requirements, such as make, year, model, interior features, and delivery times.

You should also know the usual trading tactics . If the other party is always referring to urgent deadlines or someone they need to talk to, remember that these may be pressure tactics. Only use such tactics yourself with caution.

Do not allow pressures to force you to accept a point that does not satisfy you. Ask for a break if you need it. Each time you come to an agreement on a point, confirm that you have understood it correctly and put it in writing.

In some professions, suppliers set artificially high prices which are then subject to permanent discounts. If this scenario applies to your business, then make sure that any concessions made by the supplier are genuine – negotiate discounts beyond the normal level.

Price negotiation

Some price negotiation techniques will be familiar if you have ever haggled in a market.

Never accept the first offer – make a low counter offer . It is likely that the other side will come back with a revised figure. Always ask what else she may include in the given price.

If the price is oddly low, ask yourself why. Are the goods of a sufficiently high quality? Do they really offer good value for money? What will after-sales service look like?

You can also try to make the price look high by exposing any ongoing costs. Ask questions about repair costs, consumables and other expenses. If the supplier’s current market condition means prices are falling, mention it.

If the price includes features you don’t need, try to lower it by asking to remove those features from the contract.

Use your bargaining power to get a good contract. For example, if you are a large customer of the supplier, you could ask for quantity discounts .

Remember that if you drive the price down too much, perhaps by threatening to walk away from negotiations, you might just get a bad deal. The supplier might have to cut costs elsewhere, in an area like customer service, which could prove costly for you in the long run.

Even if you’re a supplier’s biggest customer and enjoy almost all the bargaining power, forcing them to meet prices that could put them out of business won’t protect your reputation as a highly valued customer. The supplier would soon be looking for other customers and is likely to resent it.

Perform supplier checks

Before signing a contract with any supplier, it is essential to carry out due diligence to ensure that they can meet the contract.

You need to check the creditworthiness of potential suppliers to make sure they have the cash to deliver what you want, when you need it.

This is especially important if you are entering into a long-term contract. For example, if your vendor is the only available vendor of the customer relationship management (CRM) software you install, you need to be sure that you won’t run the risk of seeing them go out of business. The supplier will also likely check you to make sure you can afford to pay for their product or service.

It is also best to get references regarding the supplier from other customers. The supplier must be happy to connect you with some of their former customers. If not, ask yourself what he is trying to hide. However, remember that he is unlikely to connect you with an unhappy customer.

Sometimes a manager in a company makes an offer on contracts and then transfers the account to another person. If it’s likely to be, make sure you’re happy with who the work will be assigned to – and that you’ll be able to deal with the manager if any issues arise.

Drafting a contract for your purchase

When all points have been negotiated and an agreement has been reached, it is best to obtain a written contract drawn up and signed by both parties.

Although verbal contracts are acceptable and legally enforceable, it is very difficult to rely on them in court.

Both parties must agree on what the contract will cover. It will usually include:

  • price details, payment terms and delivery schedule
  • a clause setting out the supplier’s rights regarding ownership of the goods until full payment has been made
  • a clause limiting the contractual liability of the seller – taking into account the rights of the buyer under the law
Depending on who has the bargaining power in the discussions, the terms and conditions used could be yours, the supplier’s, or a combination of both.

You should consider obtaining legal advice when drafting your standard terms and conditions.

Aim to get a contract that protects your interests and shifts legal responsibility for any issues to the supplier. Tell the supplier in writing how you intend to use their supplies and ask for written confirmation that what they are selling you is suitable.

It is best to ask explicit questions about any hidden issues and keep a written record of any assurances given.

Make sure your contract covers the level of after-sales service you need.

Build into the contract what will happen if there are any problems with the goods or services. For example, will the supplier replace only defective goods or the entire batch, and when? Agree on penalties for failing to meet delivery deadlines or quality standards, such as a later discount.

You should also consider including dispute resolution procedures or exit procedures that can be followed if either party is dissatisfied with the relationship or wants to end the contract.

Eleanore Frinqois

Eleanore Frinqois, Lead Editor at BusinessGrowthCoaching.co.uk is a business leader with over 30 years in both start-up and enterprise level organisations. Previously Operations Directer at a £1.8BN media group, alongside setting-up and later selling 3 digital brands - Eleanore has expertise across all aspects of business growth.

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