The procurement process is most effective when there’s an ongoing dialogue between the various stakeholders. This is especially true when contracts are being finalized and why procurement negotiation is so important.

Procurement Negotiation

Understanding procurement negotiation

Negotiation in procurement refers to the process between buyers and suppliers to arrive at a mutual agreement concerning the terms and conditions of the procurement contract. Good procurement negotiation incorporates the needs and objectives of both parties to fuel shared growth.

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When done effectively, good procurement negotiation puts you in a position to build strategic business relationships for long-term success. With strategic procurement negotiation, you can:

Improve quality
By negotiating the terms and conditions of the products or services sourced, you can ensure receiving the best possible quality for your price.
Manage risks
From delays in delivery to supplier bankruptcy, negotiation can help you anticipate and manage potential risks to minimize supply chain disruption.
Build long-term relationships
The idea of a negotiation is to allow both parties to win. With strong procurement negotiation, you can establish healthy, long-term supplier relationships thriving on mutually beneficial terms.

Incorporating data in procurement negotiations is vital

Leveraging relevant data plays a significant role in garnering useful procurement negotiation outcomes. Without access to the correct data, it can get tough to make informed decisions, support your negotiation strategies or optimize outcomes. When you use procurement data during negotiations, you can:

Evaluating procurement negotiation with numbers: Track these financial metrics

Here’s a question to ask yourself: Wouldn’t you have a better negotiation position with your supplier if you had insight into relevant information like their financial position and performance? To ensure the procurement negotiation goes in your favor, here are some supplier financial metrics you must consider tracking before negotiating: 

Revenue (net sales)
This helps to determine a supplier’s overall financial health and bargaining power. If they are performing well in the market, you can put in a stronger bid.
Gross margin (%)
By calculating the difference between a supplier's revenue and the cost of goods sold, you can understand how profitable the supplier is and negotiate a better deal in case of higher margin availability.
Debt to equity ratio (solvency)
If you know the extent to which your supplier is using debt to finance their operations, you can use that information to gain financial leverage over the negotiation process as per the supplier’s financial stability. 
Operating profit margin (%EBIT)
By calculating the difference between a supplier's operating income and revenue, you can gauge the supplier's profitability. If high, you can bargain more and close yourself a better deal.
Liquidity (current or quick ratio)
Understanding a supplier's financial stability in terms of their liquidity position can also help you understand to what extent you need to bargain.
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