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How can you use supplier negotiation metrics to save costs?

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If you want to save costs and improve your supplier relationships, you need to measure and evaluate your negotiation performance. Supplier negotiation metrics can help you track and analyze how well you are achieving your goals, identify areas for improvement, and communicate your value to stakeholders. In this article, you will learn how to use supplier negotiation metrics to save costs in six steps.

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1 Choose relevant metrics

When negotiating with suppliers, the first step is to choose metrics that are SMART: specific, measurable, achievable, relevant, and time-bound. Examples of these metrics include total cost of ownership (TCO), savings, value, and satisfaction. TCO is the sum of all direct and indirect costs associated with acquiring and using a product or service from a supplier. Savings is the difference between the initial price and the negotiated price, or the reduction in TCO achieved through negotiation. Value is determined by the benefits or outcomes that the supplier delivers to your organization. Lastly, satisfaction is the degree of satisfaction or dissatisfaction that you and the supplier have with the negotiation process and outcome.

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Charles Webb

President at The Webb International Group LLC
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One of the best ways to do your metric analysis for negotiating new contracts if you are the supplier is to analyze not only their items and pricing, but if you can get their quantities of use per item, then you can see a weighted analysis by item. This will allow you to provide very competitive margin pricing on the most heavily used items and improve margins for lower use items.

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2 Collect data

The second step is to collect data from various sources to measure your metrics. You can review contracts for terms and conditions, compare invoices for actual prices and fees, survey suppliers and internal stakeholders for feedback on the negotiation, and generate reports from procurement software or systems to show performance indicators and trends. Different methods and tools can be used to gather data, providing valuable insights into your negotiation process.

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Ray P.

Procurement Director | Lean Six Sigma, Procurement Expert
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As a procurement you’re almost always going to be out gunned going into a negotiation. Sales teams are generally better trained, have more tools, and know the market better. Your job initially is to close this gap and get as close to parity as humanly possible. There are a number of tools on the market such as Procurement IQ or Unum Marketplace. The GSA also publishes a lot of rates you can use as an additional data point. You can also run RFIs to collect data from potential suppliers. There also formal and informal networking you can do to gauge if your pricing is inline with the market.

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3 Analyze data

The third step in evaluating your negotiation performance is to analyze the data you have collected. You can use benchmarking to compare your performance with industry standards, best practices, or competitors. Additionally, you can utilize gap analysis to determine the differences between your actual performance and what you are aiming for. SWOT analysis can be used to assess your strengths, weaknesses, opportunities, and threats in the negotiation. Additionally, cost-benefit analysis can help you weigh the costs and benefits of your negotiation decisions and actions.

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4 Communicate results

The fourth step is to communicate your results to your suppliers and internal stakeholders. It is important to present your results in a clear, concise, and compelling way, utilizing visual aids such as charts, graphs, or dashboards. You should also emphasize your achievements, challenges, and recommendations for improvement. To maximize the impact of your communication, consider tailoring your message to your audience by using language and terms they understand and care about. Additionally, provide context and evidence to explain how you measured your metrics and support your claims with data and examples. Most importantly, focus on value and impact by demonstrating how your negotiation results contribute to your organization's goals and strategy.

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5 Implement actions

The fifth step is to implement the actions that you have identified or agreed upon to improve your negotiation performance. You should follow up on your commitments, monitor your progress, and adjust your actions as needed. For example, you can negotiate better terms or conditions with suppliers, seek new suppliers or alternative sources of supply, implement best practices or processes to streamline negotiation activities, and train or coach yourself or your team to develop or enhance negotiation skills. These actions can include discounts, rebates, warranties, standardizing templates, tools, criteria, planning, communication, and persuasion.

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6 Review and refine

The sixth and final step is to review and refine your supplier negotiation metrics and evaluation. Periodically assessing your metrics and evaluation to ensure they are still relevant, accurate, and useful is key. In doing so, you should also take into account your feedback, learning, and experience. Some questions to ask yourself in order to review and refine your metrics and evaluation include: are the metrics aligned with your current negotiation objectives and strategy? Are the data sources reliable, valid, and timely? Are the analysis methods and tools appropriate, effective, and efficient? Are the results clear, consistent, and credible? And are the actions feasible, measurable, and impactful?

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Ajaypal Singh Bedi

Assistant Vice President Materials at UltraTech Cement
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In my experience if you do your homework properly, understand the suppliers perspective, collect relevant data, analyse, evaluate and summarise then it’s become easy to carry out win win negotiations.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you use supplier negotiation metrics to save costs?

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3

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1 Choose relevant metrics

2 Collect data

3 Analyze data

4 Communicate results

5 Implement actions

6 Review and refine

7 Here’s what else to consider

Contract Negotiation

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How can you use supplier negotiation metrics to save costs?

1

2

3

4

5

6

7

1 Choose relevant metrics

2 Collect data

3 Analyze data

4 Communicate results

5 Implement actions

6 Review and refine

7 Here’s what else to consider

Contract Negotiation

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