How To Negotiate When "Time Is Money"
PurchTips edition #241
By Charles Dominick, SPSM, SPSM2, SPSM3
Can Smart Negotiation Lead To Great Performance?
Is your performance measured primarily by cost savings? If so, the first term you look for in a proposal to be negotiated is probably the price, right? But should reducing prices always be your #1 negotiation priority?
While management likely looks to cost savings to judge your work, your internal customers may evaluate procurement performance differently. They want their purchased products and services to be of reliable quality, supported by great supplier service, and, perhaps most importantly, delivered on time!
If a key product or service is delivered late by a supplier selected or managed by the procurement department, internal customers may feel that the procurement department failed them. They may not even care much about prices as their work, which requires the purchased product or service, might have a value to the company that dwarfs the cost of the purchased product or service.
Can negotiating too hard on price hurt your chances of getting good performance from a supplier? In some cases it can, especially when buying services. Getting a lower fee may make a supplier less motivated to perform well for your organization, thus giving higher priority to customers from whom it earns higher margins.
I'm not suggesting that you avoid negotiating price or neglect the area that management uses to evaluate your performance. I am suggesting that you can negotiate price in a creative way to increase the chances of on-time supplier performance in time-sensitive situations.
For example, where on-time delivery is critical, you can begin a negotiation by saying: "What you've proposed is what we consider a premium price. We usually push for rock bottom prices. However, we'd be willing to pay a premium price for premium performance. Here's what we propose: you reduce your price by 10%; however, if you deliver within 30 days after receipt of our order as you promised, we'll pay the price in your proposal."
A related approach is the use of liquidated damages clauses. However, complex laws govern them and can render some unenforceable. In addition, their use can strain relationships because suppliers feel that they can only lose. But by negotiating as we suggest, suppliers feel that they can win by giving you what you want - on-time delivery.
In some cases, getting on-time delivery might be the best way for a procurement department to contribute to profitability. As the saying goes: "time is money."
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