The Value of Information

Procurement within the automotive industry has long centred on manufacturing analysis and target piece pricing to deliver value. One major brand is exploring other ways to unlock value through the sourcing process to great effect.

For large but ancillary tenders such as media agencies, events and roadside assistance programmes, one premium manufacturer has evolved its negotiation strategy to ensure that extra value is created through the negotiation process.

The OEM have cannily leveraged one of the strongest cards in the hand of any purchase-side organisation and one that is often overlooked and indeed given away for free – information.

By recognising the significance of this information to suppliers, the company is able to value different pieces of information held and ‘offer’ them for sale during the negotiation process. These pieces can vary from the number of suppliers remaining in the bidding process to the relative cost position of the supplier against the leading bid, and would command varying concessions accordingly.

Suppliers can initially be wary of this technique but any fears can be allayed by producing a formal, structured and simple procedure for the negotiation which is shared in advance with all participants.

This structure should clearly set out what will be on offer at particular stages of the negotiation. The OEM also clearly specified that these were one time opportunities and that they wouldn't be presented again if declined. This creates a pressure on the supplier to take the opportunity - a pressure that sales and marketing professionals will recognise as time bound close.

It also makes sense to 'ramp up' the stakes as the negotiation progresses. Begin with the opportunity for the suppliers to discover, for example, how many of them have been invited to the negotiation day. Price the information accordingly - this could be a 1% or a 5% reduction on their contract cost, piece price or whatever is suitable for the project.

As the day develops, up the ante with information considered more valuable, such as relative cost information, current position information or even budget information if appropriate.

Each time suppliers must commit to a predetermined reduction in their price - independent of anything that is agreed in the negotiation itself.

Breaking up periods of verbal negotiation with these 'offers' also denies the chance for the supplier to reflect fully on the areas in which they have conceded - though it is important that they don't feel overly pressured or they may err on the side of caution when it comes to reductions.

Critical Success Factors

There are several aspects that should be well considered before utilising the approach on a major sourcing project.

Firstly, the information available needs to be valuable and appropriately priced. This ensures that the exercise is worthwhile and prevents participants from becoming frustrated at the process.

Secondly, ensure that all suppliers that are invited to participate would be genuinely acceptable propositions for the supply requirement. This means ensuring they meet all scope requirements and, crucially, engaging the end user to obtain their buy-in and support.

Perhaps the single most powerful 'carrot' the buying organisation can dangle is the opportunity for a supplier to walk away with a contract - or at the very least a concrete award decision - on the day. Sales teams and account managers are typically target driven when it comes to new and retained business. Thus, the lure of the heroic return to the office, contract in hand, can be alluring and commonly elicit greater reductions than would be possible if the buying organisation needs to take the decision away for consideration or further approval. Make this possible by briefing approvers and agreeing a target whereby no further approval will be required. Ensure that suppliers also bring their decision makers.

Finally, provide equal opportunity to all suppliers and don't waiver from the format issued in the brief. This builds the trust between the organisations and will flow through the lasting relationship.

By recognising the true value of the information that is routinely held, buyers can extract the most value available from structured negotiations.

#Negotiation #NegotiationDesign #Automotive