Merchandising?Getting a Good Deal
by Loida Noriega-Wilson
When FORMER U.S. Secretary of State William Seward negotiated with Russia for the purchase of Alaska in 1876, was the price he paid fair? Wasn't $7.5 million too much to pay for ice?
I've learned during the course of negotiating prices for more that 25 years that time is the true test of a good deal. Remember when you found an item that was going to be the next best seller? You worked on the deal for weeks, maybe months. Through sheer persistence you negotiated the price you wanted. Then the delivery was late—so late you missed your selling window.
What happened? Unreliable vendor, of course.
Or what about when the goods arrived on time but you couldn't sell them because the quality was not what you specified and not to your company's standards. What happened? Unreliable vendor.
Then there is the story you love to tell: the great deal you made that was the No. 1 best seller that season. Everything was perfect ... except for the low profit margin that we won't discuss. We've all had these experiences.
Let's talk about "widgets." You're the widget buyer for your company, and you've just developed the best widget of your entire career. Now you must get it made and delivered before Christmas at the price you want. Only one problem: You're not sure what the best price really is for this product.
Following are six steps to negotiate the best possible price for your widget. I've tested these steps and found that whenever I don't follow my own rules, I always lose. I've used these rules when training new buyers, and it gives them a guideline for successful negotiations with their vendors.
#1: Do Your Homework
This is the most important and the most time-consuming rule to follow. But it will lay the foundation for all your negotiations. Consider the following questions:
• What components do you need to make this widget?
• What do individual components cost?
• Who manufactures these components, and at what price?
• What are the different qualities available and myriad prices?
• Where can these components be manufactured?
• What's the lead time to get these components?
• Do you know if your competition is making something similar?
• What do you like or dislike about your competitor's widget?
• How is your widget different?
• Where does your competitor make his widget, and at what price?
• What factory could produce your widget?
• Can the factory work from drawings, or do they need a sample?
• What's the best country in which to manufacture your widget?
• What's the manufacturing time needed to make your widget?
• What is the approximate quantity you'll need?
Once you have the answers to these questions you'll be able to "cost" your widget fairly accurately, except for the factory's profit margin and labor costs. Knowing the components, quality and cost of each unit will help you decide as to the price/quality relationship right for your company. It's important to let your factory know you're very familiar with all aspects of pricing the components given the quality you require. This will narrow your vendor's "bluff window."
These questions also will help you determine where to look for a factory to manufacture your widget. Having done your homework you can select from two to three factories to cost your widget to your specifications.
#2: Put Yourself in the Vendor's Shoes
• What is the industry standard for profit margins?
• Does the factory have a seasonal slow time it would like to fill?
• Is the factory financially sound?
• What type of reputation does the factory have with its customers?
• What could your business mean to the factory?
• Can the factory handle the volume?
• What are the factory's needs?
• Does it have a reputation for shipping on time?
Once you know where factory personnel stand on these issues, you can use them to your advantage when negotiating.
#3: Set Your Parameters
• Set your budget.
• How much money can you spend to buy your widget?
• Based on your approximated cost"in Rule No. 1, and your targeted profit
margins, what's the price of your widget?
• How does this compare to the competition?
• Does the price fall within your original plans?
• What is your delivery window?
• Do you need all your widgets at once, or can you accept a flow of goods
over a time period?
• Can you buy the widgets early to take advantage of a slow seasonal time for the factory?
• How much cash flow would this tie up?
#4: Know the Customs and Traditions of Your Industry
• What customs does your industry have?
• If working in a foreign country, what are the customs and traditions of the
people?
I once was awarded a contract because I had asked the factory owner about his son's birthday. In that country, birthdays are very special, and he was honored that I cared enough to ask.
Never underestimate the importance of the personal side of the business. Honor and respect the traditions/customs of the people. Building relationships is the key to success. The most successful negotiators are those who build strong ties with their factories.
#5: Work With the Factory to Reach a Win/Win
Using all the information you've gathered to reach your targeted cost price (based on the quality and delivery you want), sit down with each of the factories to which you've given the costing details and review each price, line item by line item. If your factory knows more than you, you're at a disadvantage. By going through each line item, you'll find the discrepancies and can make adjustments.
• Did the factory use your same quality standards for each component?
• Is their calculation for consumption of goods the same as yours?
• Did they allow too much waste?
• What is different in their number than what you expected?
• Can you buy more to bring down the price?
• Can they manufacture during a seasonal slow period?
• What ideas can factory personnel offer to cut corners to the cost, yet keep the same quality and look to your widget?
• How much future business can the factory expect from you?
This process takes time. With practice comes speed. By the time you've worked with one or two vendors, you'll have a good idea about the limits the factories can work within. This will allow you to view price differences and factory differences and decide what's best.
If factory personnel can't make their profit margins, the likelihood of them cutting corners is high. There are many ways to cut corners that are not immediately visible: inferior materials, quality defects, etc. If a price is too good to be true, it probably is!
# 6: Keep Your Word
Once you've agreed to a price, delivery date, etc., give the vendor an order, and stick to your word. If an unforeseen event occurs to affect the order, contact the vendor immediately and negotiate the best way to handle the situation.
Your word and honor are all you have. Build relationships to serve you well for your entire career.
Loida Noriega-Wilson is president of The Norwil Group, a management and corporate consulting firm in Cranbury, NJ. You can reach her at: (877) 667-9454, or loidawilson@home.com.