Cutting Supplier Costs, Part 2: Negotiating with Suppliers to Leverage the Market in Your Favor

Cutting Supplier Costs, Part 2: Negotiating with Suppliers to Leverage the Market in Your Favor

Last month we talked about cutting supplier costs as part of a three-part series designed to help manufacturers increase revenue to keep up with the constantly growing A&D market. As one of the first steps to cutting supplier costs, we recommended, based on research conducted by the Boston Consulting Group, that the first step is gaining better insights into the supplier costs.

Today we move onto the next step: negotiating more effectively with suppliers. Negotiating with suppliers helps A&D companies become empowered to persuade suppliers to cut costs, especially when those suppliers are attached to major programs. Negotiations may not be a breeze, but they are essential to helping your company thrive.

According to the Boston Consulting Group’s findings, manufacturers can take the following three steps:

  1. Set a Defensible Target Price – You can gain an edge by better understanding the economics involved regarding a specific component from a given supplier. Methodologies commonly used include a “top-down” and “bottom-up” approach.

Top-down refers to how a supplier’s costs for a component move down the experience curve. Essentially, the first completed, highly advanced product off an assembly line will cost far more than the hundredth, which then costs far more than the thousandth. This rate of decline for total system cost is then standardized on an experience curve, which determines what top suppliers should be charging after a certain volume.

Bottom-up approaches include looking at individual components of a whole piece of equipment. You can typically find these subcomponents on the open market, allowing companies to determine a reasonable cost for each of them, combined with assembly labor costs.

  1. Develop Leverage Points – One way of developing more leverage points with the supplier is knowing how a supplier generates profits and how that profit pool will likely grow over time.

Suppliers make money using a variety of techniques. Some sell to OEMs as part of an initial product or platform contract, some sell directly to the government, and some focus on aftermarket sales of replacement parts. First, you need to understand a supplier’s business model and then you can determine a position of leverage during negotiations.

You could establish leverage by offering to strengthen the relationship between your company and the supplier. You might invite a supplier to bid on the next key product available or adjust payment terms to titer down costs gradually. You might also change demand by increasing or decreasing future orders, effectively designing your future supplier based on the development of your products.

  1. Negotiate – Once you have determined a defensible price and established leverage points, you can apply the data to negotiate. Key tips to remember when negotiating, according to the Boston Consulting Group, are:
    • Aim high from the beginning
    • Rely on facts and data for your argument
    • Consider the supplier’s perspective and how you may work together
    • Realize the consequences involved if the supplier turns you down
    • Remained organized, coordinated, and consistent

If you follow these guidelines for negotiating with suppliers, chances are the conversation will lead to follow-up discussions and resolutions. Make sure your company presents a united, well-informed argument that illuminates benefits for both sides, clearly detailing target cost, logic, and mission.

For more questions about effectively negotiating with suppliers, contact us today.