How to Deal With "At Risk" Vendors

Imagine that you are reading the Sunday paper. You suddenly see your vendor’s company name in an article about their stock value plunging on news that they were experiencing "constraints" delivering their services. On August 10th, that very thing happened to the customers of Swift International (Swift). "Where Have All the Trucker’s Gone?" [Sunday Aug. 10, 2014, New York Times] Apparently, Swift (and presumably other logistics providers as well) cannot find enough qualified drivers to work for wages that have decreased by up to 6% on an inflation-adjusted basis in the last decade. Those customers that had not already heard the news read about it in the paper. If you are a sourcing, contract or procurement professional, this type of news should cause you to pause and reconsider your vendor pool. [inlinead] Traditionally, buying companies would seek to limit their risk exposure by diversifying their vendor pool. But if a lack of drivers, or any other kind of qualified personnel in your industry, means that a diverse pool of vendors will face the same challenge, it is time to do something different. The answer lies in the method the buying and selling company uses to negotiate value. Most companies think that using a collaborative negotiation approach should be reserved for the service providers who are already performing well. That’s a huge mistake. Negotiating Value The problem lies in the bargaining process, not in the attempt to control costs. Both the buying company and the service provider speak only of claiming their value (each attempting to capture as much margin as possible), rather than about ways in which to create and then allocate newly created value. The book, Getting to We, outlines three ways business people negotiate value. Negotiators can: claim value (literally take the largest share of a limited resource) create and then claim value (expand the pie and then take the largest share of that pie – a limited resource) or they can create and allocate value for mutual gain. This third method for negotiating value is literally a framework. Unlike conversations centered around claiming value, which are one-off events, the two companies are in effect structuring an approach to work together to solve problems associated with rising costs, disruptive innovations and pressures to reduce costs. Allocating value may seem too good to be true: it is not. Allocating value is real and companies have done it. The article "Unlock Value By Decreasing Vendor Risk" describes how two companies successfully allocated value by decreasing risk. Establishing a financial framework instead of a one-time negotiation to fix the fee does require a significant shift in both companies’ mindsets, however. You may have at least one "at risk" vendor in your pool and that vendor is likely facing pressures that are industry wide. Rather than take a more traditional value-claiming approach to negotiating (or enforcing) the agreement, try establishing a value allocation framework instead.

How to Deal With "At Risk" Vendors

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