Slashing supplier costs without strategy creates fragility. Proxima’s Gemma Thompson explains what works instead.
Australia’s high-rate, high-inflation cycle is now embedded in balance sheets. Arguing otherwise is a distraction. But what looks like a cost problem is also a risk problem.
In these times, the instinct is to slash spending as fast and far as possible. But this is an uncomfortable reality; your suppliers are hurting too. Yes, your business needs a better price. But you need your suppliers to survive, and critical relationships protected.
Bad cost-cutting creates fragility. And fragility may turn out more expensive than inflation.
Negotiating hard means negotiating smart. Picking your battles. Making intentional trade-offs. Landing on costs that are acceptable now, and a supply base that works for you in 12 months’ time.
Think about the following five principles.
Transparency trumps threats… in most cases
“In light of the current economic circumstances, we are requesting all suppliers to fund a 10% discount until XXX” is a note that is probably being readied in a number of meeting rooms around the world. That might work for some suppliers, but not all.
Step one – know who you are negotiating with. What value does a specific supplier bring, and therefore what are the consequences that you are playing with? What’s their impact on cost, growth, innovation, productivity, and risk? What’s their market context?
Not all spend should be treated equally. Understanding a supplier’s role and importance, as well as the cards that they hold is a critical first step to inform your approach.
Step 2 – transparency feeds clarity. Unpacking input cost structures and understanding what’s really changed provides a fact-based platform for negotiation. For key relationships, be transparent about your own pressures to encourage them to do the same and move the discussion away from the tactical and into mutual value creation.
Transact with consistency
Be ordered and consistent. Inconsistency makes suppliers price in contingency. One of the fastest routes to savings is to be ordered and predictable, so that the contingency can come out.
What does this look like in practice? Being clear about what, when, and how much, and sticking to it, makes you a reliable customer. Outlining that in a negotiation allows suppliers to sharpen their offers around those commitments. Why? Because suppliers are dealing with financing costs, volatile input prices, rising labor costs and potentially constrained demand. Helping them to overcome these obstacles helps you.
Of course, this can be two-way. A negotiation is an exchange between both parties. Know what you can offer and let the supplier do the same. Furthermore, ensure that your usage or consumption is consistent with what is agreed. Do you need more or less than previous? What happens if you need more or less in the future?
Create certainty.
Simplify to save
Inevitably, there are purchases happening today that are over spec’d, and purchases happening today that could be (regrettably) re-spec’d to reflect the need to cut back. Where do you need the Ferrari, and where can you use a Ford?
Here, you should be looking not only for simplification of each specification, but also for simplification in how you order. You are doing everything possible to reduce any friction, customisation, or diseconomies of scale that add extra cost.
Extra features or premium specifications? Do you need them, and does the customer value them? Can you strip back some or all to reduce input costs and simplify production?
Scattered ordering patterns? Can you consolidate to increase the average common order size to enable suppliers to produce for less and create economies of scale in admin and logistics costs?
You need to assess what is really adding value here. In times of Covid it was common to see tactics like range rationalisation and bulk ordering. That may not be needed yet, but buyers and suppliers being efficient helps both parties get results.
Respect competition
Ever seen any of your insurance or subscription costs go down without challenge? No? Well, the same is happening with your suppliers. Cost is layered into contracts year after year, often without empirical challenge. Further, buyers get reliant, and relationships get cozy. The answer? Competition.
A true business partner will respect your right to compete. If the relationship is really a partnership, they will also back their ability to win, and be able to evidence a history of providing value. An incumbent supplier that can proactively magic up a discount to avoid competition should sound the warning siren; with their costs also rising, shouldn’t they be asking for more, not less? Just what have they been charging you?
Competition is the primary lever in procurement and getting to the right costs. Being able to avoid running a competition because your team has market benchmarks at their fingertips is rare, but it is the best possible approach for speed to value.
Cost out ≠ risk out. Use all long- and short-term levers.
Negotiation in times of stress might come across as a cost discussion, but really, it’s a risk discussion. You are looking at how to reshape commercial models so that both sides can operate under stress, i.e. let’s attribute the right levels of increased pain and reduce gain (in many cases). Bad savings will show up later, with interest.
It pays to assess the level of increased risk for a lower cost. You may be taking on lower quality or service, or a less experienced team. You may be negatively impacting a relationship with a supplier also used by competitors. Every cost action must be tested for its risk impact, not just its P&L benefit.
Longer term, consider the upsides for suppliers who help you now. Can you increase the contract length? Can you factor in an upside for suppliers down the track? Demonstrate commitment while recognising the importance of the current financial strain.
The key risk for businesses goes beyond inflation itself and into how they respond to it. The companies that come out strongest will be the ones that understand how and where to cut, and how to co-invest in longer-term success with true partners. Smart negotiation is built on transparency, consistency, simplification, competition, and long-term thinking.
By Gemma Thompson, Principal Consultant, Proxima Australia
Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.
