Negotiating with suppliers and when to walk away

06/09/2016

Negotiating with suppliers

Negotiating with suppliers

When your company has selected a new international supplier, the negotiation process must be handled carefully and the terms of the deal finalized to the satisfaction of both parties.

If your company is intending to resell manufactured products, contractual terms will involve details such as the number of units required, warranty conditions, product availability and technical documentation, as well as promotional or advertising support.

However, when the deal revolves around services, raw materials, components, machinery or equipment, the terms will be adjusted to the specifics of the transaction.

The following sections address the negotiated considerations that are essential in this type of transaction.

Priority negotiating elements

Price is obviously a vital area of the deal to negotiate. When negotiating a price, the company should address the following questions:

☑ What volume is being purchased?

☑ Are discounts available as volumes increase?

☑ What logistics costs related to imports and transportation are covered in the price?

☑ Does the price include packing, cargo insurance and customs duties? Note that each of these items will be borne by either the exporter or the importer and will be included or excluded from the quoted price of the goods.

☑ When do the supplier’s responsibilities end and those of the importer begin, as determined by the contracted Incoterm?

☑ What are the expected payment terms and how will they affect company cash flow?

☑ Are there discounts for accelerated payments?

The answers to these questions will not only determine the final price, but may also later have consequences for defining and calculating the value of the goods for any applicable customs duties and taxes.

Before signing an agreement, the supplier and the purchasing company must define who will be responsible for carrying out the different parts of the agreement.

For example, who will arrange for transport, insurance, export and import permits, and customs clearance and inspection? All these responsibilities may fall to one of the parties to the transaction, or they may be apportioned in some other way.

A case study in walking away from the table

A negotiating team from a Canadian high tech company had completed two weeks of discussions with a Chinese buyer. All the details had been agreed to and both sides sat down to initial each page of the agreement while the other participants were waiting in an adjoining room decorated with flags of both countries and featuring champagne for celebratory toasts.

As the Canadians began initialing their copies, one of the Chinese negotiators interrupted the proceedings to explain apologetically, that they needed an additional 25% discount to the agreed price. The Canadian team looked at each other, smiled at the group, and stood up, telling their hosts that they would be returning to the hotel and leaving in the morning, since they had offered their best prices.

On arriving at the hotel they received an urgent call from the Chinese side agreeing to the settled terms and inviting them back to the negotiating hall, where they enjoyed champagne and received the fully initialled contract.

The lesson to be taken here is that first, there are schools of negotiating techniques abroad that train their teams well, and second, walking away is one of the options a company should always be prepared to implement.

Note also that this is a case of supplier leverage, where there was limited competition and the product quality had been previously established in the market (“the Mercedes effect”).

Making the best sourcing decisions for your company

This article excerpt and the guide it was taken from outline the key steps to be taken in making the right outsourcing decisions. To learn more about supplier negotiations and outsourcing check out the International Business Guide: FITT International Business Guide: Pros and Cons of Outsourcing Product Manufacturing and Services funded in part by the Government of Canada’s Sectoral Initiatives Program. The subject is treated in more detail in the various FITTskills courses, particularly Global Supply Chain Management, which are offered by the Forum for International Trade Training. Head to our resources page to read the rest of the guide today for free! 
Disclaimer: The opinions expressed in this article do not necessarily reflect those of the Government of Canada.

About the author

Pamela Hyatt

Author: Pamela Hyatt

I am a Content Marketing Specialist for the Forum for International Trade Training (FITT). You can find some of my work on TradeReady.ca. My background is in copywriting, journalism and social media. My passion lies in connecting people to the stories that are most important to them.

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