When You're in Short Supply - Negotiating with Powerful Suppliers When There Are No Acceptable Alternatives

When we enter into negotiations, we like to imagine we will be on a largely equal footing with the other party and both able to discuss a deal from a mutually beneficial position. We also often assume that both parties will have other options available to them, and can walk away from the negotiation if necessary and have their needs fulfilled elsewhere.

However, this is often not the case, and procurement officers can regularly find themselves in negotiations with a supplier that is far larger than their organization is, meaning they'll have to reach an agreement from a position of relative weakness.

Making this situation even more challenging is the fact that a supplier will also often be your only option when it comes to procuring certain items. To make matters worse, the supplier will likely be aware of this fact and can enter negotiations knowing they're your only option.

Clearly these two scenarios can exist independently of one another, or you can end up facing both simultaneously. All is not lost, however, and there are ways of effectively negotiating in either of these challenging situations.

Negotiating with Power

Did you know that in 1900, the American Government had 35 different suppliers they could choose from to procure cast rail wheels for railway building projects? However, 100 years later only two remained and the balance of negotiating power had shifted significantly from buyer to supplier. Now, in 2021, there is only one supplier left.

Clearly, in a situation like this, the buyer has no choice but to accept the supplier's price or get out of the railway building business. They could manufacture their own, but that would require a significant capital investment which would exceed the reach of most organizations.

In these situations, procurement teams need to go back to the drawing board and rethink their negotiating strategy. Entering into these discussions with the traditional mindset of driving down the price through tough negotiation clearly won't fly here, so a new way of thinking is required to reach a mutually beneficial agreement.

A Fresh Perspective

Thankfully, there is more than one way your organization can provide value to a powerful supplier.

One method of achieving this is to act as a gateway to new markets for the supplier. It may be the supplier has been struggling to break into a new market your brand is already operating in. In this situation, you can use your organization's existing presence to offer the supplier a foothold in that market and request a better price on supplied goods in return.

Another method of negotiating from this position is to reduce the supplier's risk through a long-term contract. You agree to continue purchasing the supplier's products over a multiyear contract and they agree on a flat price for the duration of the agreement. They enjoy the security of regular business, and you see the benefit in your bottom line.

You can also consolidate purchasing within your organization to access better deals. Let's say your company has several departments which are all responsible for procuring their own stationary supplies independently. If you consolidate all stationary purchasing into one order that covers the entire business, you can get a discount for bulk ordering. This strategy will require excellent communication and organizational skills between departments, but the results should be worth the effort.

However, your most powerful weapon in these scenarios is research. Do your homework and find out everything you can about the supplier with all the above strategies in mind. If you go in without understanding your opponent and their wants and needs, you are hamstringing yourself from the word go.

"It may sound obvious, but being prepared is the best advice," says Business School Professor and Negotiation Expert, Giuseppe Conti. "If you don't plan in advance - whenever you go into the meeting without preparation, without background work - the other party will take advantage of you. They will use their leverage and will strike a much better deal than the one you could get."

Final Thoughts

Negotiating from a position of weakness is never ideal but, as you can see, there are ways to mitigate your disadvantages in these situations. Do your research and be open to alternative methods of offering value to a powerful supplier and you can still achieve the best deals possible.

Handling difficult negotiations is set to be a hot topic at ProcureCon Indirect West 2022, taking place in April at the Sheraton Grand at Wild Horse Pass, Phoenix, AZ.

Download the agenda for more information and insights.