Buying well is a fundamental skill to ensure the profitability of your business whether you are an individual or a company. Unfortunately, this crucial aspect is often overlooked because you have other priorities and lack resources. But buying well also means negotiating... Knowing that this negotiation would dramatically improve your finances, would you continue to ignore it?
Mapping your purchases means controlling them
Buying well means, above all, prioritising your purchases. One effective method for doing this is to map them.
When you start this exercise, don't drown in the minute details but instead focus on the major items using an 80/20 approach.
The methodology is relatively simple: for each key purchase, expense or investment, indicate the supplier, the amount and its necessity (essential, appropriate or superfluous). At the end of this factual analysis, you will have a clear vision of the importance of each of your suppliers, which could help you in a later negotiation.
At this point, and depending on the financial health of your business, you will already be able make decisions in accordance with your contractual obligations. This way, unnecessary purchases can be stopped as soon as possible, appropriate purchases re-evaluated and those that are essential renegotiated.
Buying well follows a relatively linear, iterative process that requires good preparation. Before purchasing and implementing a process that might seem like a white elephant, it is essential to ask yourself questions in terms of the impact on both the cash flow and profitability of the business.
The pruchasing process: important points
The different phases can be summarised as follows:
1. ACCURATELY DEFINE YOUR INTENDED PURCHASE AND EVALUATION CRITERIA
A generic approach is not compatible with the concept of "buying well". You will need to be as specific as possible by determining the type of purchase (product/service) and its characteristics such as functionalities, technical performance, quantities or even frequency in relation to a service.
2. STUDY THE MARKET
Before you begin, study the market as best you can, in terms of companies, similar or substitute products and services, and prices, among other things. This knowledge will allow you to strengthen your bargaining power later on.
3. DETERMINE YOUR SELECTION CRITERIA
Depending on the complexity of the purchase and its "strategic" importance, you will have to ensure beforehand that the selected supplier will fulfil its obligations without incident.
In order to reduce the risk of a potential default, the best way is to conduct your "investigation" into the supplier's reputation, financial health and the quality of their products/services. You can also ask for references that you can then contact.
Your criteria can be objectified and weighted in a selection table according to your requirements. As a general rule, in addition to the financial health of the potential supplier, the table should include, without being exhaustive, price, quality, reliability, delivery times, after-sales service, CSR commitments (fair trade, circular economy, etc.) and certifications.
4. SET YOUR OBJECTIVES
What do you want to get out of the negotiation? The answer must be clear and unequivocal.
Each case is unique. In times of shortage, for example, the availability of the product/service will be more important than the price.
5. PREPARE FOR THE NEGOTIATION
In order to maximise your chances of success, it is essential to invite several suppliers to submit a tender based on specifications. This step can be more or less formal depending on your organisation.
The fact that you have determined your selection criteria will allow you to evaluate tenders objectively and meet with each successful tenderer.
You will engage in negotiations with at least two or three suppliers whenever possible. It is obvious that in an "oligopolistic" or even "monopolistic" market, this will not be possible.
The negotiation will focus on the criteria you have identified. One trap to avoid is the price trap. Don't stop at the nominal value but focus on the total cost of ownership. The price is usually the tip of the iceberg, to which must be added peripheral costs such as transportation, insurance, delivery times, warehousing, maintenance, payment terms and even non-quality.
Paradoxically, the lowest price is not always "the cheapest". Don't be tempted by the lowest price, ask yourself if the supplier has what it takes to ensure a win-win business relationship over the long term.
Accept that there is a bit of "a game" by identifying your objectives that must be met and those where you are open to making concessions.
Don't overlook the general terms and conditions which can be quite unbalanced and totally in the seller's favour. We'll talk more about this below.
You are probably not a professional negotiator and negotiation is not your cup of tea. You could fall prey to the most experienced salesperson.
However, thanks to your preparation and the selection of several potential suppliers, you are in a very good position.
The pitfalls to avoid are letting your emotions get the better of you, feeling weak and/or being distracted by your counterpart's negotiating style. Remember, while you need the supplier, they also need you.
Also remember that you don't have to conclude the negotiations no matter how much time you invest in the process. If the proposed agreement is not satisfactory, do not sign it. In this case, you can postpone the negotiations or even stop them altogether and focus on other options. There is nothing to prevent you from negotiating in parallel with other selected suppliers.
7. PREPARE THE LEGAL FRAMEWORK
After long discussions, the negotiations have come to a successful conclusion. It is now time to move from promises and intentions to the contractual rights and obligations of the parties. In addition to agreeing on the thing and the price, the contracts will include the penalties for non-compliance with the contract clauses and the guarantees given. It will also contain the terms and conditions for dispute resolution, the conditions for activating penalties and calls upon the guarantee.
This contract will prevail in the event of a dispute, which is why it is recommended that you have someone advise you before you sign it. Depending on the issues, it is not unusual for there to be some back and forth between the parties' solicitors.
8. MONITOR THE BUSINESS RELATIONSHIP
Once the contract is signed and the business relationship is underway, it is right to monitor it in order to build the relationship, ensure compliance with the contract and also act quickly in case of problems.
The actions to be implemented will be adapted depending on the importance of any problems and their frequency, ranging from the search for a remedial solution to a court summons or mediation. You must keep the notion of cost/benefit in mind so as not to embark on costly and risky actions.
9. REVIEW YOUR CONTRACTS REGULARLY
Don't rest on your laurels, the market is constantly changing. Renegotiate your key contracts on a regular basis. This will allow you to take advantage of new opportunities and signal to your suppliers that you are serious about them.
In conclusion, the steps described above are applicable to all cases but their application will depend on the issues at play.
The proposed process is relatively simple to set up and does not require any particular experience. Controlling it, especially for your key purchases, will be an essential lever for reducing your costs, improving the quality of the products/services purchased and increasing the profitability of your business.