Why Procurement Needs to Rethink Who They Negotiate With
It’s a common and often unquestioned practice: suppliers decide who represents them in negotiations with procurement. Typically, these representatives are sales professionals – Regional Directors of Sales, Business Development Managers, Account Managers, or the like. Their titles may vary, but their function remains strikingly similar: to sell. However, this norm warrants a closer examination. Why is it always salespeople that suppliers send for negotiations?
The answer is simple: because it’s profitable for the supplier. Salespeople understand their company’s limits on price and profitability and are authorized to negotiate within those parameters. But here’s where the problem lies: procurement professionals have accepted this arrangement without question. The real question is, should they?
The Critical Oversight in Procurement Negotiations
Procurement’s reliance on supplier sales representatives is, arguably, one of the profession’s biggest mistakes. Why? Because these individuals are authorized to negotiate price but not equipped to address cost. The distinction is vital. Price negotiations revolve around profit margins – a small slice of the overall cost structure. True savings lie buried deeper, in the underlying cost drivers.
Our research has revealed an average of 18% cost savings opportunities hidden within the cost streamlining of end-user demand. These savings don’t come from squeezing suppliers for lower prices but from addressing inefficiencies in specifications and statements of work (SOWs).
Shifting the Focus: From Price to Cost
To achieve meaningful cost savings, procurement must shift its approach. Here are some practical steps to consider:
Demand Detailed Cost Breakdowns Insist on line-item quotes instead of lump sum pricing. Ensure cost categories are broken down and ranked from most to least expensive. This transparency is crucial for identifying significant cost drivers.
Engage the Right People For each major cost category, bring the relevant supplier stakeholders into the negotiation room. For example:
If raw materials dominate costs, involve the supplier’s design engineers.
If logistics is a significant expense, have their logistics experts present.
For custom components, collaborate with both your internal design engineers and the supplier’s manufacturing engineers to explore cost-effective alternatives.
Focus on Cost-Effective Specifications Partner with end users to refine demand specifications in a cost-conscious manner. This internal collaboration is as essential as external negotiations.
Elevating Procurement’s Role
Chief Procurement Officers (CPOs) must champion this shift. By focusing on cost rather than price, procurement can transform from a cost center to a Value-Added Center of Profit, driving enterprise-wide competitive advantage.
Dozens of Fortune 500 companies have successfully adopted this approach, leveraging advanced procurement strategies to achieve measurable results. The path is clear: procurement must challenge the status quo and demand more from themselves and their supplier relationships.
Final Thoughts
Procurement professionals, it’s time to rethink your approach. Move beyond low-return strategies of hammering for better prices and uncover the re
It’s a common and often unquestioned practice: suppliers decide who represents them in negotiations with procurement. Typically, these representatives are sales professionals – Regional Directors of Sales, Business Development Managers, Account Managers, or the like. Their titles may vary, but their function remains strikingly similar: to sell. However, this norm warrants a closer examination. Why is it always salespeople that suppliers send for negotiations?
The answer is simple: because it’s profitable for the supplier. Salespeople understand their company’s limits on price and profitability and are authorized to negotiate within those parameters. But here’s where the problem lies: procurement professionals have accepted this arrangement without question. The real question is, should they?
The Critical Oversight in Procurement Negotiations
Procurement’s reliance on supplier sales representatives is, arguably, one of the profession’s biggest mistakes. Why? Because these individuals are authorized to negotiate price but not equipped to address cost. The distinction is vital. Price negotiations revolve around profit margins – a small slice of the overall cost structure. True savings lie buried deeper, in the underlying cost drivers.
Our research has revealed an average of 18% cost savings opportunities hidden within the cost streamlining of end-user demand. These savings don’t come from squeezing suppliers for lower prices but from addressing inefficiencies in specifications and statements of work (SOWs).
Shifting the Focus: From Price to Cost
To achieve meaningful cost savings, procurement must shift its approach. Here are some practical steps to consider:
Demand Detailed Cost Breakdowns Insist on line-item quotes instead of lump sum pricing. Ensure cost categories are broken down and ranked from most to least expensive. This transparency is crucial for identifying significant cost drivers.
Engage the Right People For each major cost category, bring the relevant supplier stakeholders into the negotiation room. For example:
If raw materials dominate costs, involve the supplier’s design engineers.
If logistics is a significant expense, have their logistics experts present.
For custom components, collaborate with both your internal design engineers and the supplier’s manufacturing engineers to explore cost-effective alternatives.
Focus on Cost-Effective Specifications Partner with end users to refine demand specifications in a cost-conscious manner. This internal collaboration is as essential as external negotiations.
Elevating Procurement’s Role
Chief Procurement Officers (CPOs) must champion this shift. By focusing on cost rather than price, procurement can transform from a cost center to a Value-Added Center of Profit, driving enterprise-wide competitive advantage.
Dozens of Fortune 500 companies have successfully adopted this approach, leveraging advanced procurement strategies to achieve measurable results. The path is clear: procurement must challenge the status quo and demand more from themselves and their supplier relationships.
Final Thoughts
Procurement professionals, it’s time to rethink your approach. Move beyond low-return strategies of hammering for better prices and uncover the real savings within your organization’s cost structure. This is how procurement can truly shine as a strategic driver of value. Now go and do something wonderful.
P.S. Dozens of the Fortune 500 have collaborated with us to elevate procurement department capability with strategies like this, helping them shift from cost center status to driving advanced procurement and negotiation strategies that have them recognized as a Value Added Center of Profit. Contact our office at executivelearning@competitorsview.com to set up a 30 minute discussion with one of our client advocates to find out more.
- Piece by Omid Ghamami