Dealing with price increases
The rapid rise in commodity prices is leading to the inevitable round of price increases from FMCG companies to maintain profit levels.
How should a buyer best respond to such demands?
Crudely, there are two opposite reactions: to hard bargain and force the other party to drop its demands, or to work collaboratively to develop greater value for both parties.
Initially, the buyer may have an emotional response, feeling anger that they face such a demand and instinctively wanting to reject the proposal out of hand. This might lead to a competitive option, head-to-head conflict and the likelihood of bitter recriminations from both parties. This may well be contrary to their common interests.
Staying in control
A skilled negotiator can help buyers separate their emotions from their behaviour. They can learn not let their ego influence their response and to stay in control of themselves. They can learn to recognise that this is not ‘us against them’ situation, and that competitiveness breeds competitiveness. And they can learn that to simply reject the proposal will eliminate options.
Instead, skilled negotiators take a more objective approach, by understanding the problem from the other party’s point of view. What is driving the price increase? What is happening to commodity prices? What are the causes? What are the long-term implications? What are the other party’s needs?
This requires preparation, which generates information, and information affords greater power. A more positive approach is to use the problem as an opportunity to create value for both parties.
To create value effectively, a skilled negotiator will first use their questioning skills. It was once said that “you can tell whether a man is clever by his answers; you can tell whether a man is wise by his questions”. More questions will prompt more answers.
Appropriate questions need to be supported by an ability to interpret the meaning behind the words. What are they really saying? What will they accept? What other variables are important to them? What happens if commodity prices drop later?
Buying out risks
A smart buyer will analyse what happens later in the relationship and negotiate now to offer advantages tomorrow rather than rescuing today. They will use this opportunity to buy out risks and gain greater value-add from their suppliers. Often these intangible benefits are worth far greater than margin. In other words, they will focus their attention on the value of the deal rather than merely the price. Price is one part of an ongoing relationship.
They will examine where they may be able to extract value for themselves, and identify what they could obtain of equal or higher value in return. By being able to trade variables that have a lower cost to one party and a higher value to the other, they will add value into the negotiation for both parties. They recognise that the best way to beat a proposal is to make a proposal. Any solution will be based upon a proposal they have made.
To derive long-term value, both parties must work together. There is a danger of slipping toward hard bargaining, but this is disruptive and can end in a win-lose scenario. Skilled negotiators will seek to work jointly and create long-term value.
Consider the paperwork suppliers are asked to fill out as part of the process. What information is supplied for validation, and is it generating leverage for one party? Remember, never sell in negotiation. Think about the soft communication that starts before the formalised written communication. Think about the time needed to find a result, and the pressure that goes with that.
Create extra value through negotiation, assuming that commodities will increase in price. If this cost is not passed on to the end consumer through retail prices, someone in the supply chain has to lose.
Nick Harvey is the head of Australia and New Zealand for global negotiation consultancy The Gap Partnership. This article appeared in the July edition of Inside FMCG magazine. Subscribe now.