Negotiating supplier contracts

Before reaching a supply contract agreement, you will have to negotiate with a potential supplier.

Negotiation is a process of agreeing on the details of a deal and the relationship that you will have with the supplier. Efforts you make prior to beginning the negotiation play a significant role in achieving a successful outcome. Make sure that you thoroughly prepare for contract negotiation and set objectives for contract negotiation.

Determine if you will need legal counsel at the negotiations and make sure that the person representing the supplier has the authority to negotiate.

Negotiation strategies for supplier contracts

There are many ways you go about negotiating contracts, but if you're new to the process you may want to consider some tried and tested negotiation strategies.

The most common approaches include the following:

• competing with the supplier - ie asserting your own interests
• collaborating - ie working together to develop business
• yielding to the supplier's interest - eg if the supplier is critical to your business
• compromising - finding a balance between your interests and those of the supplier

Different supplier negotiation strategies will fit different scenarios. You should consider all the possibilities well in advance of any meeting. To make informed choices, you should fully understand:

• the current market conditions
• the commercial position of the supplier
• your own negotiating objectives

Set out your preferred negotiating strategy in writing. This will help you define clear goals and work out where to draw the line and, if necessary, walk away from the deal.

Use leverage in contract negotiations

When choosing your negotiating strategy, be aware of any potential leverage that you might have. For example, you may strengthen your bargaining position if you can:

• help the supplier enter new markets or industries
• help them to reduce their business risk
• bring new value to them in any other way
• consolidate orders if you go with a different supplier
• bundle product or service packages to maximise the value of a deal
• afford to withhold or cancel orders
• offer them any incentives

This knowledge will help you to identify appropriate negotiating behaviour and develop a clear plan for interacting with the supplier and advancing your interest in the negotiation.

Find more negotiation tips for dealing with suppliers.

Affordability is naturally a key factor in any contract negotiation, but remember to consider other factors as well. The cheapest deal is not always the best deal. The reliability and stability of the supplier are often as important as the price. See how to negotiate a supplier price.

Use win-win negotiation strategies whenever possible. When both sides stand to gain from the agreement, the odds of a long-lasting and successful partnership are much higher. Find out how to build strong supplier relationships.