Three Keys to Negotiating Manufacturing Costs with Suppliers
Once you’ve found a manufacturer or supplier who you think you want to work with, the next hardest part is negotiating the right pricing. If this is your first time manufacturing this sort of product, it will be hard to understand how much you should be paying for your products.
A quick trick to that is by getting multiple quotes from multiple suppliers. Though some suppliers will obviously be better and pass more tests in our due diligence process, by getting multiple quotes you’ll have a ball park figure for what something should cost and have more leverage when negotiating with the supplier you want to work with.
When we help our clients negotiate, we always use the following three tactics to get them better pricing:
Bring New Value to Your Supplier
Though bringing new value to your supplier may seem counter intuitive at first, it is actually the most smooth way to negotiate. To bring value to your supplier we often say we’ll bring them new clients, reorder a lot, and even be a gateway to new markets.
This approach helps build your relationship with your supplier and makes them see you as more than just a potential customer. As a example, by being a gateway to new markets, you’ll be redressing a power imbalance in your negotiation that is too good to pass up in exchange for price concessions.
Change How You Buy
If you don’t have the ability to add value to your supplier, your next best bet is to change your pattern of demand. Instead of ordering quarterly, maybe bulk your orders together and order two a year.
This approach will have implications on other parts of your business so it requires close collaboration with other functions like demand planning and marketing. As a example, if you want to consolidate purchase orders, know that the busy holiday season will most likely be when you sell the most amount of product. Plan your manufacturing schedule around this when you order in bulk to get better pricing.
This is the last call when it comes to negotiating when suppliers. No one likes when either side plays hardball so be very careful when taking this approach. To take this appraoch, you can threaten to cancel orders and exclude them from future orders. Threatening litigation may be used too, but when dealing with international suppliers we recommend steering away from this, as it can cause more problems than actual solutions.
When working with a client producing backpacks, their negotiation got to the point where this founder was ready to play hardball. He loved the supplier he was working with and the samples he had made were great. He had sent over 30% of the invoice to start manufacturing, and instead of paying the remainding 70% like he owed, he paid about 60%. The manufacturer obviously noticed they had been short changed and they went back and forth for about a month before the manufacturer gave in. Though the founder finally got his products after over a month of delay because of this hardball tactic, he did finally get his products that he was more than satisfied with. This negotiation ruined the relationship he had built with this supplier and he therefore left to find another. In the long run, the hardball tactic is rarely worth it.
As you can tell, dealing with suppliers can be difficult when talking about pricing. They will always have their own reasons for why a price should be high and you will always have your reasons for why it should be lower. The key to negotiation is in creating value for your supplier and building a relationship with them over time.