Including non-price variables in your strategic sourcing negotiations is important.
Price is important, but we need to keep in mind that multiple other factors will impact the overall value of your negotiation. The most obvious non-price variable is payment terms. Where else can you find an effective 37% interest rate on your money? By negotiating a Net 30 14-day 2% payment discount, you can do just that.
If you’re looking to better incorporate payment terms into your negotiations, follow these five simple steps:
- Just ask. Suppliers are keen to win your business. Otherwise, they wouldn’t be participating in your event. A seller will frequently be set on a firm price but may have the ability to make concessions in other areas. This is particularly true if your seller is a larger company with access to a lower Weighted Average Cost of Capital (WACC). That said, be careful of extending payment terms as the math can sometimes be underwhelming when weighed against relationship factors.
- Make it part of the bid. If you’re not incorporating non-price variables such as payment terms, it’s time to start doing so especially for larger higher-value bids. Doing so through parameters is not complicated, and your Scanmarket account manager or consultant can show you how. In addition to making a more comprehensive bid, it will also allow you to incorporate the information for future reference and improve the audit trail going forward.
- Know where you stand. The most arduous part of better payment terms management is determining exactly where you stand today. While you could conceivably do this offline in an Excel spreadsheet, it would take so long that you wouldn’t be able to accomplish anything else for the rest of the year. Instead, use your Scanmarket Contract Management or Spend Analysis system to help you find the data you need. These will also help you keep better tabs on new and existing terms going forward.
- Get help from others. This is where Finance should really be your friend. By their very nature, Finance should understand the implications of changes in payment terms. They will also help you determine the relative cost-of-capital impacts. Most importantly, they can be your best ally in transferring any payment terms benefits to your savings goal metrics.
- Be flexible. Above all, remember that you and the winning supplier will be entering a relationship once the negotiation is over. Declaring a change in your payment terms may result in a short term boost but harm the overall relationship. Instead, work with the supplier to explore what would be best for all parties.
For more information on these approaches or to learn more about how Scanmarket can help you achieve your business objectives, please visit us at www.scanmarket.com or contact your Scanmarket account manager.