What to check in the cost structure before a supplier negotiation

The difference between two and thirty per cent

In the trade publication Beschaffung aktuell, Steffen Eschinger, a negotiation trainer and consultant in strategic procurement management, describes what the usual approach leads to: anyone who merely compares quotes and threatens to switch to an alternative supplier achieves a discount of at most two to three per cent. By contrast, according to the same source, anyone who knows the supplier’s manufacturing costs in detail can unlock savings potential of up to 30 per cent – and figures above ten per cent are not uncommon.

The difference does not lie in negotiating skill. It lies in what is actually being negotiated: a price – or the costs that make up that price.

What needs to be on the table before the conversation

A cost structure analysis breaks a supplier’s price down into its components before the conversation begins. Three questions are the focus here:

• Material or work performed? What share of the price goes on raw materials and intermediate products, and what share on production, labour and overheads? A supplier who points to increased material costs should be able to put a figure on that share – the rest of the price remains room for negotiation.
• Where does the price sit against the market? Typical industry cost shares and margins can be benchmarked. If a quote deviates significantly from them, that is a concrete starting point for the conversation – not a blanket suspicion, but a figure.
• Where do avoidable costs arise in the supplier’s process? A review of the manufacturing and process steps often reveals cost drivers that have nothing to do with either material or a fair margin – for example rework, waiting times or batch sizes that do not fit one’s own order quantity.

Only these three answers produce a target range that makes it possible to argue a case – rather than merely make demands.

Why this is more than negotiating tactics

A supplier confronted with a plausible cost structure reacts differently from the way it does to a blanket price demand. Eschinger describes savings from a combined cost and value analysis adding up to more than 30 per cent in individual cases – not because the supplier becomes more generous, but because it becomes clear where there is actually room for manoeuvre and where there is not.

That also changes the tone of the conversation. A negotiation that opens with ‘Your price is too high’ produces resistance. A negotiation that opens with ‘This cost component is twelve per cent above what we see for comparable processes’ produces an explanation – and the explanation provides a basis for further work.

Where this openness reaches its limits

Not every supplier is willing to show its hand to the same extent, and not every situation can bear the same tone. If you source a critical component from a single supplier, too aggressive a demand for disclosure can strain the relationship without ultimately producing any more transparency than there was before. Here it helps to run the cost structure analysis internally first – using market data, raw material indices and your own technical knowledge – and to bring it into the conversation as a basis for discussion, rather than framing it as a demand to see the supplier’s books. The effect on your results is similar; the tone stays cooperative.

What this means for your own preparation

A cost structure analysis takes time before the meeting, not during it. That usually includes: a comparison of the supplier’s most recent quotes and invoices, publicly available raw material price indices for the relevant materials, and – where possible – a conversation with your engineering or quality assurance team about which specification is actually necessary and which has evolved over time.

Once you have done this groundwork for one important supplier, you can reuse it for comparable cases. The effort falls with every further negotiation – the effect on your results does not.

It makes sense not to leave this analysis until just before a negotiation meeting, but to establish it as a fixed part of your supplier relationships – for example once a year for your highest-spend items. The cost structure is then already available as soon as an occasion for a conversation arises, and you do not have to catch up on it under time pressure while the delivery date is already approaching.