Effective procurement negotiations in the downturn

negotiation4Effective procurement negotiations
in the downturn

Gregor Berz, Andy Dvorocsik, Daniel Deneffe and Ralf Gampfer

By: Arthur D Little

It all sounds so obvious for sub-assembly manufacturers.
On the one hand, their customers, i.e. finished product
manufacturers, are currently suffering from declining demand
and overcapacity, and are pressuring sub-assembly
manufacturers for lower prices. On the other hand, raw
material prices have collapsed dramatically. For example,
prices for raw steel, cathode copper and brazen semifinished
products declined by between 40 and 60 per cent
during 2008. As a consequence, the only thing that sub-assembly
manufacturers seemingly need to do to cope with
the price pressure from their customers is to claim lower
prices from their own suppliers of components.
Alas, supplier price reductions don’t just happen. If subassembly
manufacturers want to extract supplier price
reductions that will really give them relief from the price
squeeze by their own customers, they will have to excel in
negotiation with their suppliers. But achieving excellence in
procurement negotiations without harming your vital suppliers
is more easily said than done. In our experience, you
will achieve excellence if you obey the following five rules:
1. Create competition between your suppliers
2. Use total-value-of-ownership to compare suppliers’
offerings
3. Empower the procurement department to both
negotiate and decide
5. Choose the negotiation and decision mechanism
that is best suited to the bidding situation
5. Use the negotiation and decision process
systematically.

In this article, we will explain these five rules in detail, and
illustrate them with a real-life but disguised case study of
a company called Hamstadt (see side text for background information
about the company). While Hamstadt operates
in the automotive supply industry, the rules have proven to
be effective in any industry.

Effective procurement negotiations in the downturn

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