Level Up: Nail Your Next Negotiation
Knowledge is power, so the best way to ensure you nail your next negotiation is to make sure you have access to all the knowledge you need.
Look ahead to your next supplier negotiation – do you know what information you need to really nail it and deliver a great outcome for your business? You might think you know the supply market based on the information available to you in your organisation, but that’s only showing you half the picture.
Before you even think about negotiation, you need to know that you are dealing with the right supplier. This is where Supply Market Analysis comes in. Procurement professionals need to be able to gather their own market knowledge, understand and evaluate suppliers and their competition, and look at the long-term implications of industry trends.
The process of Supply Market Analysis needs to be part of every procurement professionals’ daily activities, but it’s a skills gap right now. This is where the experts come in.
Ahead of his highly anticipated session with The Faculty Roundtable members next month, Procurious caught up with Jimmy Anklesaria. We discussed why this skills gap exists, how to get Supply Market Analysis right (and the perils of getting it wrong!) and why even the wedding season in India could impact your next supplier negotiation.
1. Is there a noticeable skills gap when it comes to Supply Market Analysis in procurement?
JA: Absolutely! In my experience it’s definitely a skill that is noticeable by its absence. You can see the gap in the amount of money companies spend on consultants and outside agencies trying to put together a Supply Market Analysis. The only reason they do this is because they don’t have these skills internally.
When it comes to Strategic Sourcing, irrespective of the number of steps in the process, the items in the checklist are always the same: Spend Analysis; Market Analysis; Cost Analysis; Kraljik Matrices; Ratios; Porter’s 5 Forces. There’s hardly a sourcing process worth its salt that doesn’t include Supply Market Analysis.
In our programme, Supply Market Analysis constitutes at least 40-50% of the quality of the process. It’s so important to do the work up front. If you don’t, you’ll end up choosing the wrong supplier to work with, negotiating the wrong price and getting the wrong contract.
But companies sadly run outside to get this instead of upskilling their own people. It’s a dynamic process, so you need to constantly update sources of data and understand what’s changing in the marketplace. You cannot keep running back to a consultant every six months for a new report. That’s what we’re aiming to help with our course.
2. What are the key benefits to undertaking good analysis when it comes to supplier negotiations?
JA: Before you negotiate with a supplier, you need to choose the right supplier to work with. The first thing to do is gain a better understanding of the Aggregate Market. It’s not just the industry that you operate in, but how this fits together with the core competencies of the suppliers.
What is the supplier’s business? What part of the supplier’s business fits this market that you are interested in? This will help you understand if you are part of their core business, or if your industry is a ‘nice to have’, which then helps in the sourcing decision. If what you are buying is not part of their core business, there is a higher probability that the business unit may be sold. Then you’ll have to deal with a new supplier where the relationship may not be as good as the one you currently have.
When it comes to your negotiation, it’s definitely a case of knowledge is power. The knowledge can’t help you predict the future, but it can help you understand changes and trends in the market, what are the demand, supply and price drivers, and how they are impacting you.
When it comes to your negotiation, it’s definitely a case of knowledge is power.
For example, if you are in the Oil & Gas Industry, you might think you’re a major player in the steel market because you buy a lot of pipe. But you can’t look at your industry and assume that because your demand is dropping, the market’s demand is dropping, and therefore the price of steel is dropping. It shows a complete lack of knowledge on the supply market.
This is where the aggregate market segmentation comes in. In this example 70% of the demand for steel comes from the automotive and construction industries. Energy only makes up 9% of this market (and Oil & Gas only 60% of this), so you don’t move the steel market at all.
Instead, a buyer of steel in the Oil & Gas Industry should be researching the GDP, Automotive Sales and Construction projects in countries like the US, China and India to better understand what is driving demand for steel.
It’s a similar thing with seasonal impacts too. For example, you might be buying gold for manufacturing connectors. You need to follow the wedding season in India, because it drives the gold market at certain times of the year. Once you know the consumption periods, you then need to understand if people are buying more or less gold. That means looking at the value of the Indian Rupee against the US Dollar.
It’s not always about being able to negotiate a cheaper price of the commodity, but you might get a better aggregate price versus the general market because you bought at the right time. That’s why it’s called Supply Market Analysis, not Supply Market Research. You need to gather the data, but then you need to know what it means.
3. In your opinion, how wide a net does procurement need to cast for data when it comes to their supply market intelligence? And how can procurement put the data into a usable form?
JA: Let’s address the second part of the question first. You need to understand the steps for gathering data, or you’re going to end up shooting off in all different directions, wasting a lot of time and not knowing what data is meaningful and what isn’t. During our session I’ll be sharing a methodology of how to do this.
It’s quite a logical process – first you do this, then you do this as a result. For example, you don’t want to dig deep into a supplier’s financial position without first establishing that this is a supplier you actually want to work with. The process always starts with the Aggregate Market and goes from there.
The same applies when it comes to casting your net for data. You need to follow your process or you won’t know where to look, what it is that you are looking for and how it’s going to impact your decision making. You need to know what you’re looking for or you’re going to end up with data overload.
You also can’t be satisfied with just one data source. If you’re too focused on one source, then you’re potentially missing out on other good sources, or looking at a previously good source that’s now corrupt or bad.
4. How valuable is social media as a data source for modern day companies and supply chains?
JA: Social media has its pluses and minuses. It’s great for dissemination and sharing of information, something that our own analysts do all the time. The difference is that our analysts know what they are looking for, why the information helps and why it has value.
That’s where we come to social media’s negative aspect, when people dump unvetted information on it. People use the information without knowing or understanding that it comes from a source with a vested interest. It’s not there to expand the overall body of knowledge, but to further this source’s own agenda.
I’m not against social media, but in many cases the information can’t be vetted. Before we use a new source at the Anklesaria Group, we carry out our due diligence on the information by calling the person who has put the information out there. We want to confirm the quality of the information, that the sources are respectable, before we use it on client projects.
5. What are the main techniques and skills participants will learn from the course?
JA: A lot of the success of good Supply Market Analysis is following a process, so I’ll be sharing a roadmap and methodology for what this looks like. Our methodology splits the analysis into three phases:
- Phase 1 analyses the Aggregate Market, as we’ve discussed;
- Phase 2 looks at the evaluation of key suppliers and key players in the market, including how you evaluate them and put together a rating system for them; and
- Phase 3 covers the price drivers and market drivers and how to take this into a negotiation.
Phase 2 is particularly important with new suppliers or suppliers of new technologies. They tend to be very exciting and seem to have what is required to work with but have a lower rating because frequently they are going to run out of cash in three months!
Even the biggest of global organisations can slip up here. When BMW designed the Model Z series convertibles, they single sourced a new piece of technology for the mechanism for the convertible roof. However, what BMW had failed to do was dive into the financials of their supplier. Six months into production, and far too late to do anything about it, the supplier froze all their deliveries to BMW. Their own suppliers had them on cash payments because they hadn’t been paying their bills.
The knock-on effect was the production line being halted, costing BMW millions of dollars. The only solution by then was to buy the supplier to get production up and running again. Obviously, this isn’t a solution available to most businesses, but it could have been avoided with better Supply Market Analysis.
6. What successful outcomes have you seen using the techniques you are going to share?
JA: The methodology I’m going to share will help provide the attendees with important skills to deliver effective Supply Market Analysis on an on-going basis for their organisation. Ultimately this helps procurement deliver for the business in a more meaningful way. If procurement delivers 2 or 3% savings on price that’s great, but where procurement can really make an impact is in a crisis. If they can help to keep operations going when other businesses have shut down, that is the gold standard.
Until the skills gap is filled, there will be more examples of where good Supply Market Analysis could have delivered huge benefits. One comes from the Oil & Gas industry and concerns a commodity you wouldn’t automatically link to it – the guar bean. Guar is extracted from the bean for use in exploration and fracking, so Oil & Gas companies are huge buyers of these beans.
However, guar is also a critical source of food in India for low-income households. A few years ago, the Indian Government realised that the vast majority of guar was being sold by farmers to Oil & Gas companies to make more money, to the detriment of people who needed it for food. They put legislation in place that a certain percentage of guar first needed to be sold for food, before it could be sold elsewhere.
This caused the supply of guar to dramatically decrease in the open market and lead to the price skyrocketing. Procurement might not be able to control or move the price, but if you were an analyst drawing on the right data sources, knowing about these restrictions driving demand and price, then you would have had critical information to buy more guar to store before the price went up.
Ultimately, successful negotiation is all about who controls the knowledge. Supply Market Analysis is all about giving you access to the knowledge and the power. And that’s how you’ll nail your next negotiation.
Faculty Roundtable members can register for Jimmy’s Negotiation masterclass on April 22 here.