By Dr. Tom DePaoli
An information-based negotiation is a radically different approach to negotiations. It emphasizes deep knowledge of the supplier and its industry. It transgresses from some traditional approaches to negotiations. It is not the adversarial win-lose negotiation style with the emphasis on game playing, theatrics and taking full advantage of a supplier’s weaknesses.
An information-based negotiation is not the win-win model either. Information or knowledge is power, but in information-based negotiations the purchasing professional gains a deep understanding of the supplier’s industry, its margins and its culture. In essence, this is an immersion or empathy with the supplier and its competitive landscape. The best way to describe it is that the purchasing professional knows as much or more about the supplier and their industry as it does!
In my recent book Common Sense Supply Management I state, “The very best piece of negotiations advice I ever received was to know the capabilities of your supplier, their industry, their competitors, their cost drivers, their margins and their capabilities better than they do. It requires a lot of homework, digging and flat out work. You obviously cannot do this with every supplier, only the most important and most strategic ones.
“It is a powerful negotiation tactic based on knowledge, not histrionics. There is no glamour in the information-based approach. It requires immense research about the industry, the supplier’s financial condition and competitive forces. Understanding their culture and their organization is critical. You are in essence trying your best to put yourself in their shoes, and mimic as best as possible their anxieties and fears about the whole process.
“The information-based approach is not for the faint hearted or those who do not want to persevere. It should only be exercised for critical materials or services. It requires ongoing market research and it will work better when executives are actually exchanged with the supplier on their site. The resources and commitment to pull off such an information based approach are significant.”
With the Internet, the gathering of information for the information-based negotiations approach has been greatly facilitated. There are numerous industry reports, websites and search engines that can help the purchasing professional. Nothing beats personal face-to-face contact and dialogue with numerous suppliers in a particular industry. They all have a fairly keen knowledge of their competitors which can rapidly improve your overall knowledge. Since many industries are oligarchic in nature, once you understand the top three or four players in the industry you have a real good foundation from which to start partnerships with your chosen supplier.
I suggest the purchasing professional consider using the Porter Five Forces analysis. Although this is used extensively in marketing and marketing analysis, it can be invaluable to the purchasing professional. This will provide a good start for industry understanding. Another good source for information about suppliers and particular industries are distributors. Often they are glad to provide information about suppliers and especially their customer service. Here is a general diagram of the approach to information based negotiations that I have used:
One additional tactic I have successfully used during the initial trust-building phase is to mutually do supply chain process mapping of internal processes but with a twist. The supplier comes to your site and maps your processes, then presents it to your cross functional team to check their understanding. Then the purchasing professional ventures to the supplier’s site and performs a similar mapping. Often this sparks a new creative exchange of ideas.
The information-based approach has tremendous flexibility to cope with market and industry changes. Information drives decisions not emotions or one-upmanship. It requires the purchasing professional to become the resident expert on a market and an industry. It yields much more significant long-term gains than traditional or even win-win approaches. Using this approach is one of the best methodologies for transforming your supply chain and developing true breakthroughs with your supplier.