3 ways to use procurement negotiation to combat inflation

Historically high inflation is creeping into all aspects of business operations—from rising supplier and raw material costs and shipping expenses to higher wages and indirect procurement costs. One recent example: In its 2022 Annual Report, a major global auto manufacturer reported that increased industrial costs amounted to an impact of $9.6 billion.

If procurement teams have learned anything over the last three years, it’s that the status quo methods of building and closing deals no longer work in 2023. Increasing prices and passing costs along to customers isn’t a sustainable or comprehensive solution to address inflationary pressures.

So how can procurement teams combat inflation? With a world-class negotiation process deployed to all procurement negotiators and advanced negotiation skills training.

How to fight back against inflation

Companies are entering into inflation negotiations whether they know it or not. The right negotiation processes and skills are critical to an effective procurement strategy to combat these inflationary costs.

Companies can often easily see when their direct procurement costs for raw materials rise, but there are many areas across an organization’s spending profile that lack visibility. For example, on the indirect procurement side, spend detail can be fragmented and much harder to obtain which requires a robust strategy to aggregate.

World-class negotiation processes and advanced negotiation skills are the best tools for fighting inflation. Even during inflationary times, most spending can be negotiated with a robust negotiation process in place and a team of highly trained negotiators.

Here are three ways companies should use procurement negotiation to beat inflation and safeguard their bottom line:

#1: Create value in procurement with negotiation

The goal of your procurement processes must be to create value for the business and find efficiencies. This value creation is a huge competitive factor that has become an increasingly relevant purchasing priority.

This goal is particularly acute when facing inflationary pressures impacting the bottom line of the business. The thing to remember is: All value delivered in procurement is negotiated—or it’s not.

When value isn’t negotiated, it’s left to chance. In a world of many seemingly objective elements—material price, transportation cost, lead time, product and service quality, etc.—it’s easy to forget that value can be a matter of perception, and that it is negotiable.

Procurement professionals must intentionally create value that carries real weight in the course of a deal, particularly in a supplier agreement that covers more than just price. If you don’t have a robust process in place, you are unable to creatively build a supplier agreement that addresses rising costs or find value that benefits both you and your supplier.

The more areas in addition to price where you align expectations between the customer and supplier, the greater chance you have of having those expectations met.

Maybe one particular element of product cost isn’t negotiable, but can you negotiate other areas of value? Here are a few examples of value creation to consider:

● Does your supplier have additional services they can provide more cost-effectively?

● Does your supplier have lower-cost alternative materials or services?

● Can your supplier open a stockroom on your manufacturing facility floor?

● Can your supplier guarantee that they will have a certain number of days of inventory in stock?

● How much inventory is in your supplier’s pipeline and where will it be?

● How can materials be more efficiently packaged, shipped, or returned?

● What early notifications will you receive when your supplier runs into their own supply chain issues?

● In times of inflation, can you position your growth and future demand and tie it to the growth and demand of your supplier in the agreement?

Strong supplier relationships return the most value. A good supplier relationship is built not on what happens when things are going well, but on what happens when things go wrong. Namely, can you work through issues productively?

A robust approach to supplier agreements that builds value for both you and your supplier is critical to building a strong relational foundation and shared value. Shared value and positive relationships will generate better results in supplier performance than negative relationships.

So how do you create value in negotiation? With a well-defined, well-deployed negotiation process and well-trained negotiation team.

A world-class negotiation process should include principles like:

● Positioning your case advantageously.

● Setting high aspirations before you start negotiations.

● Managing information skillfully or listening to your counterpart’s needs instead of sharing too much information too soon.

● Knowing the full strength of your power.

● Satisfy needs over wants. (Learn what your counterpart needs to create a positive agreement.)

● Concede according to plan. (Think of concessions as a tool.)

#2: Standardize negotiation processes, language, and vocabulary across your organization

After defining your negotiation process, a critical component of creating, deploying, reinforcing, and measuring your negotiation process is a common negotiation language and vocabulary. More than ever, success relies on procurement’s ability to communicate clearly and negotiate capably.

Many organizations fail to align all procurement teams on the most efficient processes for procurement negotiations. Failure to align procurement teams dispersed across different divisions, sites, or regions is a critical misstep that creates inefficiency and can hinder effective negotiations.

Consider a large, global enterprise where people come together to negotiate deals that cover multiple regions, sites, and parts.

The first step is for the internal teams to align on a negotiation strategy and identify what outcome each team needs. If a team has to first figure out how to communicate what it needs, it wastes time. If each team is trained on the same negotiation process and language, they all walk into the room on the same wavelength and can start planning a strategy immediately. A common language speeds up the planning process, reduces inefficiency, and eliminates error.

A common negotiation language and vocabulary enable procurement teams to effectively build a negotiation value proposition, set goals, manage information, understand the bargaining position, and close advantageous deals.

Think about it. No automotive company would ever hire a factory floor assembler and tell them to bring their own tools and do their best. Why do we do essentially the same thing to procurement teams and expect them to excel?

Each factory worker has safety protocols, detailed assembly procedures, calibrated tools, and standardized processes. The same approach should apply to your procurement team.

#3: Don’t cut your cost cutters during challenging economies—invest in them

It’s sometimes tempting for companies to cut investments in training or even reduce personnel during tough economic times. This is a critical error that negatively impacts the bottom line, particularly during an uncertain economy.

During inflationary periods, sales teams tend to smell blood in the water. When the market is on their side, sales negotiators aggressively pursue price increases. Procurement negotiators are the best stopgap to this type of inflation.

Your procurement team’s negotiation training is a critical step in deploying a robust and standardized negotiation process across the organization. Without a world-class negotiation process and advanced negotiation skills, you leave value and dollars on the table.

Negotiation is a critical business process that requires the proper tools for success. Procurement teams need to be supported and invested in, not cut, during challenging times. After all, they are your leading cost cutters and inflation fighters.

If your workforce experiences turnover, your new hires must be trained on your negotiation processes and develop advanced negotiation skills. If you have a longstanding team, you need new ways to identify continuous improvement and disseminate updated processes.

Investing in negotiation training ensures that procurement teams negotiate with efficiency and effectiveness, stay highly engaged and advance their skills and career development. Ultimately, supply chain leaders must view training as a key component to fighting inflation, building strong supplier agreements, and delivering improved results to the business.

Combatting unprecedented inflation

Unprecedented inflation combined with service-level degradation and ongoing supply chain disruptions means procurement negotiation is more important than ever to business profitability. Defining a negotiation process, standardizing negotiation language and vocabulary, and training procurement teams across the enterprise on each are critical components to fighting inflation.

Once your procurement team has a set negotiation process and negotiation training plan, the job isn’t over. It’s critical to have a plan for how your new process is deployed, reinforced, and measured with a focus on continuous improvement.

About the author:

Mike Slomke has over 30 years of procurement leadership experience with three Fortune 100 companies, including 17 years in chief procurement officer roles. He served six years as a board of trustees member for CAPS Research, a non-profit research center at the W. P. Carey School of Business at Arizona State University, established in 1986 in partnership with the Institute for Supply Management. Mike currently serves as a leader at RED BEAR Negotiation, helping forward-thinking companies around the world, across every industry, from the Fortune 500 to high-growth start-ups receive impactful procurement-focused negotiation training that produces measurable business results. Learn more at www.redbearnegotiation.com.

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