Michael Parry’s 10 Golden Rules to Achieve Success When Negotiating with Suppliers
Sellers generally quote the price that they want - not the price they will accept. Michael Parry, President of vendor price reduction experts Parry, Murphy and Associates, is here to help us with this. Here are his top 10 tips on successful negotiating with suppliers.
From the time he was born in South Africa, Michael Parry was exposed to a very international life. His father was born in England, his mother in Poland and his sister in Cyprus. During his lifetime, he has visited about 80 countries across the globe.
After finishing high school and his compulsory military service in the South African Air Force, he completed five years of articles with the largest public accounting firm in South Africa at the time, Alex Aiken & Carter, which subsequently merged with KPMG. During his articles, he became the audit manager of two of the largest gold mines in the world, a large hospital, one of only two casinos in Southern Africa, banks, savings and loan institutions, manufacturers, retailers, hospitality and many other industries.
After spending over five years in auditing, Michael knew that he did not want to stay in the auditing profession. However, he was not sure what he wanted to specialise in. He left the public accounting profession and joined the second-largest chicken producer on the African continent, Festive Farms, as their Financial Accountant. After two years, at the age of 27, he was promoted to Chief Financial Officer of the company. Shortly after this promotion, two things happened that would influence his career forever.
While Festive Farms was the second-largest chicken producer, they also produced and supplied about 95% of the commercial turkey demand in the Southern African market. With the vast majority of turkeys being consumed only during the Christmas season, all of their large chain customers would put tremendous pressure on Festive’s parent company, Imperial Cold Storage (ICS), to sell turkey at below cost so that these chains could use low turkey prices to compete for customers over the holiday season. The threat, from these big chains, was that if Festive Farms did not sell turkeys below cost, then the big chain stores would not buy other ICS products such as seafood, dairy, vegetables, ice cream etc. And so Festive, while very profitable on the chicken side, lost a fortune on the turkey business.
At his first management board meeting as CFO, Michael asked why Festive was in the turkey business? Most of the management made fun of his question. Why would any company give up something in which they controlled 95% of the market? Fortunately, the President, James Abel, realised the significance of the question and a Board of Directors’ decision was made within a few weeks to exit the turkey business. All of the turkey farms were converted into chicken facilities and the results were dramatic. Within a year, the profit of an already profitable company quadrupled. It was this result that made Michael realise that he wanted to specialise in improving bottom lines significantly.
The other factor that had a significant impact on Michael’s future career also happened while at Festive Farms. The company was upgrading its phone system from an old plug-in board to one of the newest inventions at the time in Southern Africa, a large PABX system, and Michael was responsible for the purchase.
Two vendors were in the running. During the negotiations, one vendor was bad-mouthing the other vendor for not having any sales of the new PABX system in the Southern African market. This other vendor was one of the leading technology companies in the world at the time, the British GE, who had sold quite a few units elsewhere in the world, but not in Southern Africa. The cost of the new equipment was a lot of money back then – about 30 times Michael’s annual salary as CFO. Upon learning this information, Michael was able to turn GE’s weakness into a strength and negotiated the purchase of the PABX system from GE for free, but allowing GE to bring in one potential customer a week to look at the newly installed equipment at Festive, as long as one week’s notice of the visit was given. After GE made their second sale, they stopped bringing potential customers around. This experience was the start of Michael’s passion for negotiating win-win situations.
After Festive, Michael joined one of the oldest steel foundries in South Africa, Ferrovorm, that had recently been acquired out of bankruptcy by the construction conglomerate Murray and Roberts. Within three months, the actions that Michael implemented, enabled Ferrovorm to return to profitability and, through positive cash flow, to repay Murray and Roberts their entire investment in acquiring Ferrovorm.
One day, after meeting the German Chairman of the Board of Dürr South Africa, Michael was hired as the CFO. Dürr South Africa had not made a profit in the South African market in the entire 10 years that they had been operating in the country. Over the next two years, the company had the best results in nearly every measured ratio in the worldwide group.
In 1985, at 32 years of age, Michael was transferred to the USA as the CFO to be a part of a turnaround team to salvage the US operations of the Dürr Group, which was achieved within a few months.
From the end of 1988 until mid-1997, Michael owned his own turnaround firm, proudly achieving the record of never having a client file for bankruptcy. In 1997, Dürr asked Michael to return as CFO, as they were going on an acquisition run and the North American CEO was going to retire in 2 years. Over the next few years, over a dozen acquisitions were completed and in 1999, when the CEO retired, Michael became president of Dürr Inc. (the US holding company) and he was the only US member on the Board of Directors of the US operating and holding companies.
In 2006, Michael left Dürr and moved to Grand Rapids, Michigan. Once again, he started his own firm, Parry, Murphy and Associates, but this time specialising in helping clients, on a pure success-fee basis, obtaining fairer pricing, mainly from their existing suppliers, without negatively impacting quality and/or service.
Through experience, Michael has learned that sellers generally quote the price that they want, not the price they will accept. Michael wants his clients’ suppliers to make a fair profit and to remain viable. His focus is on identifying and negotiating better pricing for his clients where the existing pricing results in unreasonably high profits for suppliers. He even guarantees financial results.
Over the years, Michael has developed 10 golden rules to achieve successful outcomes, when negotiating with suppliers.
Strategise, strategise, strategise
Avoid negotiations without a clear strategy. If you get caught unprepared, do not be embarrassed to say that you need to get back with the other party.
Do your research and identify:
- Where you are.
- Where you want to go.
- How you plan to get there.
Developing a strategy is like playing chess. Try to develop multiple “what if” scenarios for each point in your journey. Obstacles may develop as you progress with your strategy. If the obstacle is not what was anticipated, try to avoid making snap decisions. Negotiations with vendors is like going through a maze while playing chess at the same time. Try to identify an intersection in advance and what your options are at that point. The biggest difference though is when going through a maze, one can always go back to the last intersection. With vendor negotiations, that option is not so viable. You might have to dig a new tunnel.
If you use the same starting strategy with 100 vendors, by the time you are done, the course taken could be different for all 100 vendors. The better you are able to identify the deviation in advance and to anticipate your and the vendors’ next move (or multiple moves), the more successful your negotiation will be.
Be careful of developing strategies on the fly. This art can best be improved through experience.
Have a trusted source that can play the devil’s advocate as you develop your strategies – see rule 10.
Do your homework
Try and find out as much relevant information about the supplier – website, blogs, internet searches, LinkedIn, credit reports etc. Be selective about what you let the vendor know that you have learned about them.
Prepare a key data sheet on the vendor and record what you regard as important information – e.g. size, strengths, weaknesses, advantages, disadvantages etc.
Get names of their customers and check references but bear in mind that while checking references can be useful, the vendor will unlikely give you the names of bad references, just like a job interview candidate. Through experience, there are certain questions you can ask where the way they answer will tell you a lot more than what they say.
You want to have a reputation of telling the truth. Once you have lost that reputation, life is going to be a lot more difficult, especially if your job involves negotiations.
Sometimes you have to be able to say that the answer is something that you can’t reveal. However, if you say that, in many cases, the vendor will try and analyse why you said that and then focus on other ways to get the answer (such as talking to your staff or the competition).
The best part about the truth is that it is easier to remember. More than likely, the biggest asset you have is your reputation. So hard to gain, so easy to lose.
More than likely, the biggest asset you have is your reputation. So hard to gain, so easy to lose.
One of the best tools to getting good pricing is competition. However, one needs to be careful that the competition is not working together in order to charge you a higher price. Not so easy to detect, but there are ways to avoid this. Where there is true competition, it is best to have competitors who have some sort of idle capacity. Make sure that you allow yourself the ability to negotiate.
Avoid getting cornered
Do not eliminate your ability to negotiate by saying to your vendor: “If you get your price to $x then you will get the order”. Because if they do get their price to what you ask then you will be obligated to place the order at the target price you set. Rather say: “If you get your price to $xxx then you will have a very good chance of getting the order.” The latter approach still leaves you with options such as to negotiate for a lower price with a competitor.
By fabricating a story, you increase the risk of being backed into a corner.
Try to anticipate the outcome of strategies two or three moves down the road in order to minimise getting trapped.
Always maintain a written record of your negotiations, even if it involves sending yourself an email. Record the date, time and whom you spoke with and what the conversation was about. Also, record what the next steps and dates are. Always try to review these notes before you engage in additional negotiations with the vendor.
Avoid negotiating with the qualified low bidder
All things being equal, the qualified low bidder is generally going to get the order. Therefore, negotiating with the low bidder is not a good idea because even if they say no to everything you try to negotiate, they are still going to get the order. This will be to your disadvantage down the road if you try and negotiate with them again, as they will be more likely to keep saying no.
Therefore, we recommend that negotiations take place with the second and third lowest bidders. Once you can negotiate them below the lowest bidder, then you have something to negotiate with the bidder who was the lowest bidder.
Use the vendor’s weak points to your advantage, and theirs
Keep your ears and eyes open to try to learn what are the vendor’s weak points are and look for ways to use it to your advantage. For example, if your vendor is having cash flow issues, you might be able to get a much better price if you offer better payment terms.
If the vendor puts pressure on its sales force to meet certain sales targets by certain dates, the vendor may be willing to offer certain concessions as the deadline nears. The loss of a major account will make the vendor more willing to be flexible in order to fill the void.
You do not have to know all the answers
Avoid falling into the trap of feeling that you have to answer all the questions posed to you by your vendor. You are not there to impress your vendor with the knowledge that you might be expected to know. Guessing what the answer is and getting it wrong will weaken your position when the truth comes out. Remember, it is better to be thought of as a fool than to open your mouth and remove all doubt.
Some vendors are very good at fishing to see how competent you are. Some preferred responses could be: “I need to look into that”, “I am not sure of the specifics”, “I am not at liberty to discuss that”.
Make use of an experienced, competent third party
In our experience, this is the most critical part of engaging in a successful negotiation that results in significant price reductions. The third party can be an outside specialist (such as Parry, Murphy and Associates) or an internal person or panel.
The third party needs the knowledge, experience and research tools to identify what savings opportunities are available. The buyer can use the third party as a sounding board or have the third party take the lead in the negotiation process while the buyer remains the “good person”.
For more information on Parry, Murphy and Associates, visit www.parrymurphy.biz