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Negotiations with a single-source supplier

Tricky situation, isn’t it? Both your supplier and you know that you have to reach a deal, no matter what. Yet, your management expects a further 10% cost reduction. How to deal with it?

To start with, let us define a single-source vendor.

In simple words, if you have absolutely no other option, you are in a single-source vendor situation. 

It may be a manufacturer, who built the equipment and has the technical knowledge required to fix it.

Or a situation where one company only sells the spare parts. 

If repair is done by anyone other will make the warranty void.

There is one area that is a bit “in the middle”, namely complementary products. For example, you can get Coke from one vendor only. But there is Pepsi and a bunch of other manufacturers doing a similar drink. Is it a single source? Well, only if your client or management insists on the brand.

How to start? First of all, we need to figure out what is our possible target. I would not say BATNA, as the alternative part is missing. Three things come to my mind

The breakdown of suppliers cost

Try to figure out what is the profit margin of your vendor. Of course, he will not just blindly tell you that he is making 40% from this job. Hence, you have two possible options

Find costs of similar products/services

OK, you can not get a quote for the same item, we get it. But there is no product in the world that was not copied by another vendor. Including space ships 🙂 Once you have found something similar, compare the prices. In my experience companies that have strong brands charge about a 20% premium. Therefore, if your price difference is 30%, there is still room for talks. 

Find out costs of inputs

Do you know the basic ingredients/elements of the product you need to buy? If it is a service, it is even easier, as the cost is mainly in the manpower. Try to find out what does it cost to deliver. While not accurate, it will give you some sort of idea of what would be a realistic price 

Go into details with your vendors

Just yesterday I had a meeting with a uniform vendor. Did you know that individual packaging of uniform pieces (trousers, shirts) represents 7-10% of the total uniform cost? 

Develop relationships 

A good relationship can save the day. If you are a good client, your supplier will give you a fair price.  Here you can feel the results of a good SRM more than anywhere. Recommend the product or service elsewhere. It can be your client, but as well colleagues from other companies. Invite your vendor to attend the meeting with the client. Let him see and understand your pain points first-hand. Every vendor wants his client to be successful. As this is the way to get more business.

Use all available tactics

Don’t look at this one single deal. Bundle together jobs. Promise them business in the area where they have competitors. Look into the scope and see if we can change anything. Talk about payment terms. Offer exclusivity contract with your company, where you will push for their product wherever it is needed. 

Many times during purchase of the equipment you can get a great deal on maintenance and spares. This is the time where the vendor is still not a single source. For example, buying a vehicle. Until the moment you made your choice you have many options. Once you bought it, there is only one service where you can take the car in if you want to keep the warranty. So the time to negotiate a maintenance package is not after the purchase is made. And your Total Cost of Ownership will go down, despite the fact that you are dealing with a Single Source vendor now 

In the end, after all this, I have to say: avoid a single source situation. Replace the piece of equipment, look for alternative vendors abroad. Change your process, think long term. Do whatever it takes. But don’t let the vendor take away your biggest advantage: the power of choice.

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