In 2023, global enterprises must evaluate where they have supply chain risk and pursue creative solutions to mitigate it. Two of the biggest procurement challenges in 2023 will continue to be inflation and a lack of supply chain resiliency.
In January 2023, the Producer Price Index (PPI) was up six percent over the previous 12 months. This echoes ongoing trends like that seen in March 2022 when PPI was 11.2% over the previous twelve months. If enterprises aren’t diligent, inflation will creep into their supply chain input costs undetected, with the potential to impact every facet of procurement and sourcing spend.
Inflation impacts direct sourcing costs through services and raw materials that go into making a product. Inflation also impacts indirect sourcing costs such as office supplies, travel, utilities, janitorial services, and even employee benefits. Each of these areas require strategies to detect and fight inflation creep.
Risks to supply chains in 2023 are as great as ever. Improving supply chain resiliency requires plans and strategies to prepare for these unexpected risks.
Geopolitical risk will undoubtedly continue to be an ongoing factor affecting supply chain continuity for global enterprises in 2023 and beyond. Government responses to pandemics like those seen in 2020 when many countries shut down factories and ports to slow the spread of COVID-19 will continue to cause uncertainty. Last year, the Ukraine-Russia war hit the automotive industry with Ukraine-based suppliers pausing or slowing production of critical parts. Now in its second year, the supply chain impacts are still ongoing. Government implementation of sanctions and tariffs are another geopolitical risk that supply chain operations must prepare for when prioritizing supply chain resiliency.
Natural disasters are often similarly unexpected but always pose a potential supply chain risk that must be considered. Hurricanes in the U.S. Gulf Coast region have a history of impacting the chemical industry and interrupting regional supply chains for unpredictable amounts of time. After an earthquake and tsunami led to the Fukushima nuclear disaster, procurement teams faced sourcing challenges with electrical components originating in Japan.
These supply chain challenges won’t disappear anytime soon, which means companies must build supply chain redundancy and mitigate risk within their supply chain. The companies that develop proactive procurement negotiation strategies across their business units will ultimately fare better than their competitors.
To do this effectively, global enterprises must think of negotiation strategy as a critical business process.
Here are three ways better negotiation skills help improve your procurement strategy:
#1: Robust supplier agreements build resilient supply chains.
A robust supply agreement with your supplier base must cover more than just price and terms. Today, it must also reinforce supply chain continuity.
Robust supplier agreements should align performance expectations between the customer and the supplier. The more performance areas addressed in an agreement, the greater the opportunity of having those expectations met.
Procurement teams need to think strategically and negotiate value where they can reasonably expect to have challenges. One of the key areas that provides supply chain flexibility is inventory. Inventory exists to accommodate mismatches between supply and demand.
Procurement negotiators must think through creative solutions to accommodate mismatches in supply and demand. How much inventory should be in the supply chain and where should it be held? Will the supplier hold planned inventory levels? Will they deliver parts directly to your line? If supply is interrupted, how will they prioritize delivering parts to your site?
Communication should also be a negotiated factor in supplier agreements. Early notification of supply chain disruption of materials is critical in today’s world full of possible supply chain risks. Real-time insights into supplier constraints help identify priorities for building supply redundancy and creating supply chain resiliency. These insights into your supplier’s materials should be considered a negotiation component. What’s happening on their supply side? How many suppliers do they have for their critical materials? What supply contingency plans do they have in place?
Understanding your supply chain beyond your first tier can help identify risk and inform choices about building redundancy into the supply chain. Defining and aligning on these expectations in a broad supply agreement is the first step to building a better supplier relationship.
Expert negotiation skills are essential to build a strong and positive supplier relationship, ensuring both sides are able to work through issues productively. The success of a commercial relationship isn’t defined by how it is when things are going well, but how effectively parties work through issues and problems together. The better the relationship you have with a supplier, the better the performance results you’re going to get when it comes to discretionary effort with your suppliers.
Good supplier relationships can get you more than your fair share of attention, prioritization, and service during difficult supply chain conditions. If you have a good relationship with the person who makes that decision, you can both help each other during tough times. Good supplier relationships can set you up for a better response when the unexpected happens.
#2: Procurement negotiators must be cost reducers and value builders.
All value delivered by procurement is negotiated (or it’s not and left to chance).
Too often during tough economic environments, companies relentlessly pursue arbitrary and short-sighted cost reductions without looking at the real stopgap for cost creep: procurement negotiators. Some companies even make the mistake of cutting their cost cutters instead of investing in and building a talented team. Procurement negotiators are the stopgap to inflation creep driven by supplier sales teams.
During inflationary periods, sales teams tend to smell blood in the water, expecting price increases when the market is on their side. This may cause some enterprises to solely focus on the sales side of their business by increasing the cost of goods and services, overlooking the opportunity and tools they already have on the procurement side to reduce costs and mitigate inflation.
Negotiation is a critical business process that requires the proper tools for success. These teams need to be supported with expert tools and world-class training during challenging times. Expert procurement negotiators with well-defined negotiation processes are key to delivering value and safeguarding a company’s bottom line.
So how do procurement teams ensure success?
#3: A world-class negotiation process bolsters success.
Procurement teams often have either a solid negotiation process and unskilled negotiators or they have no defined process with some skilled negotiators. Either of these situations leaves value on the table.
Enterprises know they need well-defined processes for business functions like financial reporting and performance measurement. Why is negotiation any different?
Negotiators need a clear process to follow, but they also need a common language to ensure alignment with key internal stakeholders. A well-documented process gives the right tools to every team member no matter their current skill set and enables the opportunity for Kaizen -continuous improvement.
Skilled and trained procurement negotiators rely on six key principles that help them build a resilient supply chain:
- Position the case advantageously
- Set high aspirations
- Manage information skillfully
- Know the full range and strength of your power
- Satisfy needs over want
- Concede according to plan
Each of these principles reinforces positive supplier relationships, strengthen the supply chain, and drive value. When procurement teams plan ahead and rely on repeatable process, they produce long-lasting results that minimize cost and maximize profits. Implementing a robust negotiation process is a critical first step for success, but negotiation skills require continuous reinforcement and refinement across the procurement team.
Building a Robust Procurement Negotiation Plan for 2023
Experienced procurement experts know the 2023 economic headwinds are more challenging than ever. Global enterprises need a plan to reduce risk in their supply chain in the face of unprecedented inflation, widespread supply chain disruption and ongoing geopolitical issues.
The global enterprises that use skilled negotiation tactics as a tool to reevaluate opportunities and reengineer their supply chains will be the most successful in mitigating supply chain risk. Those organizations that build a highly-trained, highly-skilled negotiation team with a world-class negotiation process will quickly outpace their competitors.
Author’s Bio
Mike Slomke has over 30 years of Procurement leadership experience with three Fortune 100 companies, including 17 years in Chief Procurement Officer roles. He served six years as a board member for CAPS Research, a non-profit research center at the W. P. Carey School of Business at Arizona State University, established in 1986 in partnership with the Institute for Supply Management. Mike currently serves as a leader at RED BEAR Negotiation, helping forward-thinking companies around the world, across every industry, from the Fortune 500 to high-growth start-ups receive impactful procurement-focused negotiation training that produces measurable business results. Learn more at www.redbearnegotiation.com.
