Now that you’ve used data to find market rates to negotiate great pricing and you’ve changed the rules to create win-win scenarios with suppliers, where else can you find value in a negotiation? In non-price parameters. As supply chain or procurement professionals, our role is not to simply cut costs. Our role is to build value. 

Performance-based Pricing

The first thing that can go onto the negotiation table to build value is performance-based pricing. These include two sides of the same coin: one based on supplier incentives and the other based on supplier savings. 

First, tying a portion of the supplier’s compensation to performance metrics increases supplier accountability to building company value. This can include quality metrics, timing (such as a bonus if the work is completed early), or even directly tying the value they bring to the company to the supplier’s payment. For example, a business helping improve your sales team might share in the percentage of sales won while they are under contract. A natural cap on this kind of incentive is to make it a percentage of value or business so the incentive costs don’t run away.

Second, a company can share savings found through supplier efficiencies or process improvements with the supplier. The most extreme example of this is when a company sends a Kaizen or Six Sigma team to a supplier to help improve their processes in exchange for savings on the material the company buys from the supplier. This method is also sometimes called VAVE or VA/VE; Value-Add, Value Engineering, and can include the supplier proposing alternate materials or new products. When I was managing a plastics commodity several years ago, a supplier would bring me new materials and which part number they were thinking of for the new material’s application. The new material would offer better hardness, or better abrasion-resistance, and I would take a first glance at the machine and part application to determine if it was worth investigating. This level of trust and value is built over time and can pay big dividends with suppliers, especially when they know they will also share in savings.

Payment Terms

Payment terms are a hot topic in procurement and have been for some time. The irony of longer payment terms is that larger companies with stronger credit are most likely to get longer payment terms from suppliers, but smaller start-ups need longer payment terms most. In my work as part of a very large company with spotless credit, we closely tracked payment terms and were constantly trying to move suppliers from 30 to 60 day terms. The extra 30 days were then available to run investments, but it was a one-time cash flow bonus (after which the system simply continued as before with money flowing out with invoice cadences). Early payment terms were especially coveted, such as a discount on invoices if paid within the first 10 days of receipt. Those terms are more out of fashion after COVID, but an early payment discount is still a way to negotiate concrete monetary value without impacting a sales representative’s commission. When I was at a start-up with little credit history, the negotiation changed to push payment terms other than cash-in-advance. Small growth companies are always a bit rocky on investments coming in, customers paying their invoices, and keeping cash flow healthy. Having now been part of both extremes, I recommend procurement professionals consider seeking value in places other than payment terms for their small business suppliers. Consider financing options in exchange for direct pricing concessions with those suppliers instead.

Warranty and Service Levels

Warranty and service levels (or SLAs) are last here because they are the first thing everyone thinks of in non-price value negotiations. Each is fairly self-explanatory, but some nuance can help frame your next negotiation.

First, warranties are simply how long a supplier is willing to stand by replacement or repair of their product or work after it is complete. When a warranty starts can be critical, as the date of manufacture could be over a year before the final customer takes possession of a final product. Make sure the warranty starts when the final customer puts the product into service. Parts sitting on a shelf should not break, so suppliers should be willing to stand behind products based on when they start doing work. If the product has a history with the company, the company should know the percentage of warranty claims customers submit in the later years of a warranty. It is rare that the components of a product have a longer warranty than the final assembly, so the company selling the final assembly is on the hook for that timing gap. Typically this cost is around 1-3% of the product price per year of warranty, such as when a component carries a 3 year warranty and the final assembly carries a 5 year warranty. When negotiating component terms and one supplier offers a 3 year warranty while another offers 2 years, modify the shorter warranty supplier’s price by your company’s estimate of that extra year of cost. More importantly, be transparent about doing so. Let the supplier offering 2 years know that their price is going up by 2% on the back end because of their warranty policy, especially if that means they are no longer competitive. Offer them the option to instead increase their warranty and effectively lower their pricing without having to lower their invoice price. 

Second, service levels can be hard to quantify but very important. It’s especially important to understand what a stakeholder values and what they don’t. In negotiations for the company’s 401(k) retirement account provider, perhaps it’s a company that is very spread out over an area and values having a sales representative spend time at each company site to discuss plan options with employees. In the same scenario, perhaps it’s more valuable to offer more 1-on-1 employee consultations at the company headquarters where 80% of the employees work. Similarly, when negotiating software agreements, uptime can be a critical service level negotiation. If uptime is part of a negotiation (such as 99.6% uptime, which means the software is allowed to be down for 35 hours in a year or almost 3 hours a month–it adds up!), remember to put some “teeth” in the cost of not meeting the service level agreement. For example, for each month the software does not meet the required uptime, the supplier puts a credit on the next year’s maintenance fee for that month. I constantly see service level agreements with no consequence for not meeting service levels beyond a vague, “we won’t consider you next time,” which results in both internal and external stakeholders ignoring the agreement.

Each of these are ways procurement can find and negotiate for value to meet stakeholder true needs, and demonstrate understanding of the commodity purchased. Key to success in non-price negotiations is always seeking value and not getting stuck on negotiating only cost. 

Next, in our last article in this series, we’ll cover what we should have started with: some basic parameters to consider and rules for negotiation.