I recently posted on issues to do with creating and maintaining a relationship with an OEM supplier. One of my readers, Nathan, suggested a followup article focusing on the finder details of negotiating with suppliers. This included questions such as what you need to know before a negotiation; good tactics to apply; negotiating prices and payment terms; what good or bad experiences I have had.
Looking back on the article, I think there is actually not all that much to add. I would point out that although the principles I outline there come across as, well, principles, you have to remain flexible. Business is all about relationships amongst people. And people react differently depending on the situation at hand, and the sort of person they are. The longer you are in business the better you get at reading people and, of course, yourself–extremely important. It is fair to say that every situation is different and you need to cultivate your EQ as much as anything else. How adaptable are you to changing situations?
What should you know? Your supplier, which is what this whole process is about. You also need to know as much as you can about 1) your business in general 2) the specific need that leads you to look for a supplier in the first place. #1 is the foundation for #2, but the more you know about what your immediate need is and the better you are able to communicate and articulate that need, the more likely a relationship will commence on the right footing.
This is because your potential supplier will be summing you up. The probability is high that you will be much smaller than them, unless they are just starting out themselves. If they are well established they will be looking to your for your future potential. You need to communicate a sense of future promise through your professionalism. If you know what you are talking about, you are a long way there. I still get many inquiries from prospective customers who attempt to cover up a lack of knowledge (#1 and #2 above) by talking up their knowledge, rather than asking the right questions. This immediately raises a red flag for me.
This relates to the issue of support. If you are small you are not going to get the sort of favorable terms that bigger customers will enjoy. Unit costs in smaller orders are higher for example. Important here is paying on time. I guess it’s a general principle that the greater the degree of value adding at any particular point in the supply chain–or to look at it another way, the closer you get to the end user–the less favorable the payment terms are going to be.
For instance, at my level in the supply chain, I average a 90 day payment terms. My suppliers in turn are on longer terms. My customers average 30 day payment terms. I have always paid on time, except on the odd occasion when cash flows become really tight due to the confluence of a number of circumstances. The main factor is usually because of delayed payments on the part of some of my customers. This relates to the question of honesty, which featured highly in the original post–if the check is “in the mail”, it really needs to be “in the mail”.
A recent incident involved one of my suppliers with whom I have a 30 day payment term agreement. They missed the first deadline and then dated the check to the end of the new month–effectively 60 days. That deadline passed (not before an increasing volume of direct communications between our offices) resulting in a frank talk. “Frankness” is probably transacted differently in Taiwan than perhaps in the US or Europe. Rather than talk of debt collectors and threats of imminent court action, the flavor of the communication was one of “disappointment” for violating trust, although nobody actually mentioned this directly. Negotiation can be about things not said, and actions not carried out, or carried through.
The upshot has been that one month’s payment has been forthcoming. However, for the next few months they will have to go back to TT in advance, which is the standard payment terms for any new dealers coming on board. So, the relationship is not severed, but redefined as both sides come to a better understanding of each other.
And this brings me to the main point of this post–the view from the supply side. The supply chain can come under severe stress when customers delay or default. The optimum way to avoid this is, naturally, to diversify your customer base. That plays into your advantage if you are looking for a supplier, since most will always be interested in diversifying their customer base. The other aspect in play here is that many customers continually test the boundaries.
They know that “agreements” are flexible and managing cash flows can be based around knowing which suppliers will accept delays, in some cases considerable delays, in payments. If you have a good relationship with a supplier, then this will be much more acceptable. But use the goodwill advanced to you by a supplier prudently–like when you experience a credit squeeze and the extra breathing space makes all the difference.
The flip side of this is when customers have paid in advance, and the supplier folds. That can spell the instant death of a business. As I mentioned in the previous post, you need to make initial orders small and just test the waters. And even after a relationship has been going well for years, it is never wise to put all your eggs . . etc.
Developing good judgement along with a little good luck means a high probability of survival. Prosperity and profit are the side effects of survival. And it all takes . . . time.