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Creative Negotiating: Rethinking the Right Way to Ink Purchasing Agreements

Long-term agreements between purchasers and suppliers are not conventional “one-and-done” deals—they are moving targets that require perpetual negotiation if they are to come close to delivering the value that inspired them in the first place. Here’s how to think more creatively about keeping such agreements fresh, friendly and highly effective.

By ·

Purchasers need to find new ways of dealing with suppliers.  It is commendable that so many procurement professionals have moved beyond the long-held transactional orthodoxies that pitted suppliers against one another to negotiate lower prices. Many of those pros now favor long-term agreements (LTAs) that yield better pricing because they allow the purchasers to concentrate their firepower on a few key suppliers. There are further benefits from lower transaction costs: fewer individual supplier files and scorecards to manage, for one thing. Equally important, purchasers can carve out the time for deep value creation that goes beyond price concessions and total-cost-of-ownership reduction alone. 

Yet LTAs are not the automatic answer either. With several decades of LTA history behind us (remember, U.S. carmakers were forging strategic agreements with selected tier one sup¬pliers back in the 1980s, for instance), we can see how easy it is for LTAs to fall short of their original objectives.

In fact, what seems like golden opportunities to minimize materials and transaction costs and cre¬ate more value can quickly become golden hand¬cuffs. When purchasers fail to adapt their negotiating approaches to align with changes in their supply chain strategies or to accommodate shifts in the supply base, suppliers on which purchasing organizations have come to depend can sometimes become complacent. Advantages achieved by the supply chain organization can swiftly dissipate.

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By ·
Download Article PDF

Purchasers need to find new ways of dealing with suppliers.  It is commendable that so many procurement professionals have moved beyond the long-held transactional orthodoxies that pitted suppliers against one another to negotiate lower prices. Many of those pros now favor long-term agreements (LTAs) that yield better pricing because they allow the purchasers to concentrate their firepower on a few key suppliers. There are further benefits from lower transaction costs: fewer individual supplier files and scorecards to manage, for one thing. Equally important, purchasers can carve out the time for deep value creation that goes beyond price concessions and total-cost-of-ownership reduction alone. 

Yet LTAs are not the automatic answer either. With several decades of LTA history behind us (remember, U.S. carmakers were forging strategic agreements with selected tier one sup¬pliers back in the 1980s, for instance), we can see how easy it is for LTAs to fall short of their original objectives.

In fact, what seems like golden opportunities to minimize materials and transaction costs and cre¬ate more value can quickly become golden hand¬cuffs. When purchasers fail to adapt their negotiating approaches to align with changes in their supply chain strategies or to accommodate shifts in the supply base, suppliers on which purchasing organizations have come to depend can sometimes become complacent. Advantages achieved by the supply chain organization can swiftly dissipate.

SUBSCRIBERS: Click here to download PDF of the full article.

 


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Article Topics

Negotiations · Purchasing · All Topics
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This is a comprehensive guide to services, products and educational opportunities targeted specifically to supply chain professionals. As with years past, we’re also featuring several articles we trust will offer food for thought in your supply chain throughout the coming year.
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