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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.

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This is an excerpt of the original article. It was written for the May-June 2016 edition of Supply Chain Management Review. The full article is available to current subscribers.

May-June 2016

The procurement function is at an inflection point.” So begins “The reinvention of procurement," an article by Jonathan Hughes and Danny Ertel, partners at the Boston-based consulting firm Vantage Partners. The authors argue that while many leading companies have transformed their procurement organizations into a linchpin of their enterprise strategy, far too many others remain trapped by procurement models that are out of date in today’s fastpaced economy, where the acquisition of innovation, collaboration, services and solutions is more important than transactions based on the lowest cost per unit. Reinvention is a fitting theme for…
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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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Sorry, but your login has failed. Please recheck your login information and resubmit. If your subscription has expired, renew here.

From the May-June 2016 edition of Supply Chain Management Review.

May-June 2016

The procurement function is at an inflection point.” So begins “The reinvention of procurement," an article by Jonathan Hughes and Danny Ertel, partners at the Boston-based consulting firm Vantage Partners.…
Browse this issue archive.
Access your online digital edition.
Download a PDF file of the May-June 2016 issue.

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.

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