Developing a positive supplier relationship should begin during contract negotiations, because it is an opportunity to recognize the goals and constraints of each business and come to a working arrangement that benefits both organizations. It is a win-win approach to risk management, and a chance to set the right tone and promote innovation through collaboration.-BY Gerald Donald

Negotiating a contract with a supplier is an opportunity to establish a positive working relationship that extends over the contract’s life. A positive working relationship means the supplier and buyer recognize conflicting interests in some areas, but the organizations can also pursue common goals that bring success to both. This win-win approach to supplier contract negotiations is the best way to create a collaborative, innovation-producing, engaging working relationship with suppliers. Approaching a contract as merely a legal document filled with what amounts to onerous orders for the supplier mainly intended to cut costs is not conducive to relationship-building, and will only harm the trust between the supplier and buyer. Start with a new perspective, establishing mutual goals and focusing on the best strategies for maintaining alignment.

Establish the Relationship Foundation and How the Relationship is Supported

In Harvard Business Review, authors Frydlinger, Oliver Hart, and Kat Vitasek discussed the role of supplier contract negotiations in developing supplier relationships in the 2019 article “A New Approach to Contracts.” The premise is that many contract negotiations begin with both parties having an adversarial and transactional mindset. Contract clauses such as “supplier shall” are the equivalent of orders and obligations, and they have nothing to do with continuous improvement and working relationships built on trust. The authors argue that a better approach is to adopt a different type of contract they call a formal relational contract. In this approach, negotiations are designed to develop collaboration, trust, and strategic alliances.

Traditional contract negotiations focus on gaining benefits at the other party’s expense, such as price changes, inventory levels, changing delivery dates, termination-for-convenience clauses, and so on. In the relational contract, the negotiations are focused on developing long-term relationships. The five recommended steps begin with laying the foundation for a trust-based partnership mentality, through transparency about goals and issues. The second step is co-creating a shared vision and objectives, and the third is adopting guiding principles. The guiding principles are autonomy, reciprocity, loyalty, honesty, integrity and equity. Step four is aligning expectations and interests, and five establishes governance to stay aligned.

Suppliers Become Collaborators

The traditional supplier contract negotiating process concentrates on something other than principles like collaboration, focusing on control through issues such as operational efficiency and price. Innovation, a strategic collaborative relationship, and participation in initiatives are not addressed because they are topics without hard metrics for measurement, unlike topics such as discounts, delivery times, price, and inventory levels. Negotiating for shared value is the essence of collaboration. For example, a collaborative relationship means the buyer and supplier agree to share information and data analytics. It is not all one-sided, with the supplier sharing information and data with the buyer.

How does a contract negotiation process support development of a supplier relationship? Communication skills matter – specifically listening skills. Approaching the negotiations with the perspective that the supplier must do all the listening does not support relationship building. A basis for collaboration requires two-way communication. It sounds so simple, but is more complicated than it sounds on the surface, because the traditional approach has been for procurement and other professionals to enter negotiations from a perspective that they will inform the supplier. The usual process begins with the winning response to the RFP or other procurement calls for bids, and conversations focus on how the supplier will meet the requirements.

Communication during negotiations is meant to form supplier relationships, and there are discussions on mutual gains. Coming to an agreement requires concessions, a willingness to question assumptions, and a recognition that biases and systemic thinking errors may influence the negotiations.

What Can Suppliers Bring to the Table?

Once a supplier enters negotiations with a buyer to agree on a contract, negotiators from the buying company can adopt a broader approach to expectations. For example, suppliers as collaborators can support much more than timely deliveries and minimum quality requirements. For example, how will the supplier reduce supply chain risks? Diving into negotiations about things beyond the price, and taking a give-and-take approach builds trust, while at the same time promoting continuous improvement.

During negotiations, win-win is the goal, but it does not mean each party gets what they want to achieve. A win-win negotiating model means each side captures value. The perspective is long-term success, and capturing value anticipates different scenarios. This is especially important in a business environment that is volatile and complex. What can the supplier bring to risk management? Three strategies to reduce supply chain risk are end-to-end contract transparency, DEI practices in supplier organizations, and sustainability practices in supplier organizations.

Upfront discussions on issues such as these establish confidence in the supplier as a partner. What if a conflict develops during negotiations? Some conflict is inevitable, however, keeping the win-win goal in mind can smooth disagreement. Ask questions, express understanding, and break down the conflict into its elements. This inevitably leads to a better understanding of the concerns leading to the conflict. It is also an opportunity to demonstrate how the supplier-buyer relationship will work in the future.

What Does Each Negotiating Party Want?

The best way to develop a negotiating process that builds a supplier relationship is to focus on what it will take to maintain a healthy business relationship that focuses on mutual interests, not things such as price position, and to discuss multiple pathways to long-term value maximization for both parties. As Vantage Partners discussed in Best Practices for Negotiating with Key Suppliers, negotiations are used to establish a good working relationship, not just specific contract terms. Negotiations are not approached as adversarial, and the supplier is supported after the contract is effective. Both sides are open to new ideas, the stage is set for effectively working together, the supplier and buyer jointly plan for challenges, and they collaborate throughout the contract performance.