Discussion of importance of contract negotiation in supply chain management

Negotiation in the purchasing process covers the period from when the first communication is made between the purchasing buyer and the supplier through to the final signing of the contract. Negotiation can be as simple as trying to obtain a discount on a case of safety gloves through to the complexities of major capital purchases. A purchasing professional must aim to be successful in their negotiations with suppliers to obtain the best price with the best conditions for every item that is purchased.

Smaller Supplier Base and Long-Term Contracts
The negotiation process has become a more important sector in the supply chain process as companies look to reduce their expenditure whilst increasing their purchasing power. This means that purchasing professionals have to negotiate increasingly better rates with suppliers whilst maintaining or increasing quality and service. In the past companies had a long list of suppliers who they would purchase different items from which required purchasing resources to spend limited time on negotiating the lowest prices. The best solution available was to compare list prices from catalogs and select the vendor based on that information. The trend over the last decade has been to rationalize the supplier base and enter into long-term agreements with single sourcing. This offers companies the ability to negotiate significantly lower prices for items that they were purchasing from a number of separate vendors.

Vendors Are Partners
The emphasis in negotiation moved away from lowest price scenario to negotiating with fewer vendors to obtain the lowest price with the best service, quality and conditions. The aim for companies were to reduce overall spends rather than negotiate lowest price with a large number of vendors, which did not give the best overall result. The negotiated long-term contracts with a smaller supplier base have produced more of a partner relationship between buyer and supplier. The relationship can become less adversary which benefits buyer and vendor. In a partner type or relationship the buyer will encourage the vendor to increase quality and service and the
vendor knows that by doing this the partnership will continue with a renewed contract with guaranteed sales.

Negotiation or RFQ
Non-government purchasing departments continue to offer a range of prequalified vendors a request for quotation (RFQ) for items or services that it wishes to purchase. The competitive bid process can produce a range of bids and conditions that the purchasing department will evaluate and then award the business. This may or may not involve some form of negotiation. Most negotiated business will involve items or services that are not necessarily definable by an RFQ. The purchasing department and the vendor will negotiate more than a price. The negotiation will usually cover what is to be manufactured or what is the extent of the service to be provided, the warranty, the transportation services, technical assistance, packaging alternative, payment plans, etc. Purchasing items or services of significant cost will require extended negotiations to arrive at a final contract. Purchasing professionals are required to participate in these types of negotiation to ensure their companies obtain the best price with the most favorable terms, and staff may need to be trained in negotiation methods as it becomes more commonplace in a difficult economic climate.

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