Renegotiation & Specifications...
PurchTips - Edition # 17 February 25, 2003
By Charles Dominick
You Want A Lower Price, But Not A New Supplier
We are called upon to reduce costs, but we also realize the risk in introducing a new, low priced supplier. Most of us have negotiated with an incumbent supplier in such situations. This practice is even more common in the current economic environment where cost cuts are the highest priority.
While renegotiating a contract to lower price without enduring the costs of switching suppliers is often a good practice, it is not without its pitfalls. One major cause of conflict is the failure to include a discussion of specifications in the renegotiation process.
We assume that what we buy will have the same quality, will be delivered in the same time frame, and will be supported by the same service despite a lower price. This is a dangerous assumption. Why? Well, the supplier assumes that, because the buyer is so desperate to cut costs, that it would be willing to accept a "minor" decrease in quality, delivery, or service. You see where this is going, don't you?
Here are a couple of examples of how failure to discuss specifications during a renegotiation process led to conflict:
A large, non-profit organization purchased about $600,000 in copier paper each year from a long-time supplier.
The supplier always delivered "mill brand" paper, which is generally regarded as being of the highest quality. Seeing that the Producer's Price Index for paper had fallen over several months, the buyer requested that the supplier reduce its price. After some discussion, the buyer and supplier agreed upon a 23% price reduction. A few weeks later, the buyer began receiving calls from disgruntled end users who complained of receiving "inferior" non-mill brand paper. The buyer and supplier discussed this dilemma without a mutually satisfactory result. The buyer later began looking for a new paper supplier.
A small business had its first tax returns prepared by a local accounting firm. Near the end of the small business' second year, the owner approached the accounting firm and asked for, and was granted, a price reduction. When the small business owner noticed an error on the latest tax return, he found the accounting firm unwilling to amend the error, claiming that the error was "not significant." The small business insisted on having the error corrected. The accounting firm's president cited a tight budget due to the discounted fees and told the small business owner to take his business elsewhere unless he was willing to pay a higher price.
Suppliers get defensive during renegotiations. It's a fact. Discussing your specifications and expectations will prevent suppliers from seeing the renegotiation as an opportunity to cut corners to preserve their profit margins.
Therefore, always, always, ALWAYS, be sure to reiterate - in specific terms - the quality, delivery, and service that you expect your supplier to provide.
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