How to Negotiate with Procurement When They Call You a Commodity

White paper · Transform · 12 min read

Sources: Pricing Insight diagnostic and Customer Value Discovery engagements, described by sector and not by client name; the Pricing Periodic Table, CXO Edition, Chapters 1, 11 and 12. The terms-versus-discount figure is arithmetic, not a result. No figure here is a benchmark for another business.

Procurement measures a supplier by the price it pays. The people who use the product measure it by what it costs them to be without it. Pricing Insight helps suppliers win that second measurement first, with the economic buyer, in the customer's own figures, before procurement files them as a commodity and opens the tender.

Two people are in every procurement negotiation, and only one of them is at the table. Procurement is the buyer's agent: it runs the process, sorts suppliers into boxes and is paid to lower the price. The economic buyer is the person who lives with the result: the plant manager whose line stops, the clinical director whose procedure pack is short, the head of operations who carries the stock. Most suppliers spend the whole negotiation arguing value to the agent, whose job description excludes it.

Five actions follow. Name the economic buyer for each major account. Build the value case with that person, from the customer's own records, before the tender opens. Find which of the buyer's four boxes procurement has put you in, and test it against the risk you remove. Choose the one response that fits the box. Then give procurement a saving it can report that is not a price cut.

01Procurement is the buyer's agent, not the economic buyer

A maker of medical consumables sold custom procedure packs to public and private hospitals. Tenders rose from 30 to 45 a year to about 80, and around 60 came back asking for a best and final offer. The clinicians who used the packs did not make the final decision. Hospital procurement teams did, pressed for open-book costing and widened the supplier panel. That is the agent and the principal in one case: the clinician carries the consequence of a short or late pack; procurement controls access to the clinician, and its brief is price.

The distinction decides where the value conversation can happen. Once a tender is live, the agent decides who the supplier may speak to, and the conversation about risk is closed. Before it opens, the economic buyer will usually take the meeting, because the risk is theirs.

02What is procurement measured on, and what is the economic buyer measured on?

Procurement's scorecard is savings against last year's price, the budget or the first bid; the number of suppliers on the panel; payment terms; and a compliant process. Nothing on it rewards a line stoppage that never happened. The economic buyer is measured on output, uptime, gross margin and working capital, and pays for the risk a supplier removes, quietly, because that is where a career is exposed when a supplier fails.

Value at risk is invisible on the agent's scorecard and central to the principal's. That gap is the supplier's opening, and it closes the day the tender is issued.

03What are the four prices a customer pays?

An invoice is one of four prices a customer pays. The invoice price is paid on delivery. The operating price is what it costs to run, maintain and service the product over its life. The replacement price is the cost of replacing it, including the cost of qualifying a new supplier. The risk price is the cost of supply failing, the product failing in use, or a technical problem going unsolved. In Pricing Insight's teaching example the invoice is about 30 per cent of the lifetime cost.

Procurement's brief covers the first price. The other three sit in the economic buyer's budget, and that is the budget a value case has to be written in. Customer Value Discovery sorts what a customer gains into two families: value in use, what the product earns and saves, and value at risk, what the supplier protects the customer from. Buyers negotiate hardest on the first and pay, without saying so, for the second.

04How does procurement sort suppliers, and where does it want you?

Most procurement teams are trained on a four-box purchasing model. Each item is placed by how much the organisation spends on it and by how much risk it carries if supply fails. Procurement pushes every supplier the same two ways: down the risk axis, with a second source, a standard specification or buffer stock, and left along the spend axis, with a tender. Procurement is not describing where a supplier sits. It is moving the supplier, and a seller who does not know that defends the price while the real contest is over the box.

05How do you match the four boxes to your value case?

Each box calls for one response, and the risk axis is where the response is found, because procurement's spreadsheet usually sets the risk of a familiar supplier at zero. The commonest error is a volume defence, a discount to hold the account, run on a critical item the customer cannot do without.

The three-to-five-times test is the rule Pricing Insight uses to hold a price difference: show three to five times the difference in value over the product's life, in the customer's dollars. A cable maker scored two suppliers on 27 things it valued. The dearer supplier won on 24, and its largest wins were in service and risk, not in the product. Procurement could not file that supplier as tactical, because the customer's own people had built the case.

06What has to happen before the tender opens?

Two steps. First, test procurement's placement against your own: does the customer treat you as a vendor, a supplier or a partner, and where does the account sit on switching cost, price awareness, relationship, growth and profitability? High switching cost and a strong supply record mean the pressure is a test, not a threat. Second, run the discovery interview with the economic buyer and take the downtime, claims and stock figures from the customer's own records.

A value-at-risk figure the supplier has calculated is an opinion in a tender. The same figure from the customer's maintenance log is evidence. A maker of food-processing casings learned the difference. Its sales team had been trained to sell product, and professional buyers pushed for a cut at every contract round. Once the team was retrained to sell the value its product carried in the customer's own process, it negotiated higher increases in Australia and New Zealand than before. The client reported the outcome without a figure.

07How do you give procurement a saving that is not a price cut?

Procurement needs a saving to report, and it need not be a price cut. On a A$400,000 order, 14 extra days to pay cost the supplier about A$1,200 a year at 8 per cent; a 5 per cent discount costs A$20,000 and takes about 38 per cent more volume to earn back at an 18 per cent margin. Longer terms, consolidated invoicing, a longer contract and a rebate paid for growth all book as savings for the agent. Trade in that order: terms, then volume, then term, then specification, with price last, and tie every concession to something the customer gives.

08Check the maths: a critical item filed as volume

Illustrative; figures assumed to teach the arithmetic. A supplier of filtration consumables sells A$180,000 a year to a food manufacturer. Procurement has three qualified suppliers, files the item as volume and asks for 8 per cent off. The incumbent is 6 per cent above the cheapest bidder, a gap of A$10,800 a year.

Production keeps a different account. An unplanned line stop costs A$22,000 an hour. Over two years the incumbent's technical support and filter-change scheduling have cut unplanned filtration-related stops from five a year to two, on the maintenance log. Three stops avoided is A$66,000 a year, 6.1 times the price gap. The cheapest bidder offers no on-site support. Switching saves procurement A$10,800 and costs production A$55,200 before transition risk.

The supplier held the price. It offered 60-day terms in place of 30, about A$1,200 a year in financing at 8 per cent, and a consolidated monthly invoice, and wrote the stop record into the agreement as a measured service level with a dated review. Procurement reported a saving. Production kept its uptime. The supplier kept A$10,800 of margin for A$1,200 of concession. The claim procurement will test is the attribution of three avoided stops to the supplier's support, so the figure has to come from the customer's log, gathered with production before the tender.

09What procurement says, and the box it signals

Each phrase below places a supplier in a box. Recognise the placement before answering the price.

10Frequently asked questions

Client examples are described by sector and product, not by name. The medical consumables and food-processing casings examples are findings from Pricing Insight diagnostic work and carry no financial result. The cable maker scoring is from a Customer Value Discovery engagement, as reported by the customer. The filtration example and the terms-versus-discount arithmetic are illustrative, built to teach the method; they are not client results. Results are as reported by Pricing Insight and have not been independently audited. No figure in this paper is typical or guaranteed.