Negotiation Tip #2

NEGOTIATION TIPS – AERONAUTIC INDUSTRY
Last week, you were more than 3,500 who read my first negotiation Tip, dedicated to the aeronautics
industry: What to do when your customer tells you “We will resource your business, if you do not reduce
your prices…”. There indeed seems to be a need for such advice!
As I was saying, as I introduced this initiative, I am clearly a proponent of “Win-Win” negotiations in order
to arrive at prosperous, long lasting relationships which will drive benefits for both parties. Unfortunately,
many customers, over the last several years, have demonstrated through their unilateral approaches and
contracts that they want to win at all costs and get the most out of suppliers, without regards to their
financial well-being. Indeed, as a former VP of Supply Chain in two large multinational aeronautics OEM,
I would have preferred to publish some advice to the purchasers as to how to structure “Win-Win” deals
so that they may reduce their supply chain costs, get their suppliers full commitment to their success and
let them flourish financially. However, most large aeronautics customers are focused on the short-term
and have extremely complex processes and structures designed so that nothing, anymore, can be simple
and based on common sense.
As such, you will therefore find herewith a second negotiation Tip among a series to come in the following
months. These Tips are designed to help suppliers better negotiate with their customers in this era of
“Win-Lose” relationships. These are based on my experiences and will cover various aspects of the Buyer–
Supplier contractual relationship. They will be focused on the aeronautics world, but I am sure that they
could well apply to other industries.
Hope these Tips will help you and please do not hesitate to share in your networks. Also, do not hesitate
to suggest areas/subjects that you would like covered.
François Chagnon
Tip #2
Understand the Buyer’s objectives and recognize the tactics they use to reach them…
Prior to entering into any negotiations, in order to reach the best results possible, it is of the utmost
importance to clearly understand the objectives of your counterpart and to be able to recognize the tactics
that he/she will be using in order to reach these objectives. As a supplier, you need to understand that
your customers, specially if they are a public company, have the following objectives, among others:
 Improve quarter to quarter financial results

 Increase liquidities
These corporate objectives translate into these Supply Chain objectives:
 Put a large % of their total spend on long-term contracts (90%+)

 Reduce prices paid to suppliers annually
 Obtain long payment terms from suppliers
 Obtain quality products and services on-time to support sales
How do these objectives impact you?
 The customer will put much pressure to sign a long-term deal, promising “verbally” that this will be
very good for you and that sales will increase rapidly in return.
o However, the actual “written” deal will state that this contract does not obligate buyer to
purchase anything from the supplier and that they can remove scope at their discretion, while you
remain obligated to respect all conditions and pricing on the remaining scope…
o In summary, the contract ties you up long-term to the customer, while the customer has no
obligations towards you, the supplier
 If, by any chance, you are somewhat hesitant in entering into a long-term deal, soon thereafter, the
threat of loosing all of your work will be made
o Then, you refer to my first Tip…

o Also, in a follow-up article, I will address the Pros and Cons of entering into long-term contracts
 As for annual price reductions are concerned, one could ask: How is this feasible if 90%+ of the spend
has been negotiated and put under long-term contract…? Indeed, hard to understand, knowing that
several contracts have been awarded with escalation clauses!
o These reductions are achieved through exercising the penalty clauses (performance and others)
contained in the deal… The buyer will basically tell you that instead of paying a penalty now… you
could offer price reductions!
o The reductions will also be achieved through threats of moving your scope to other suppliers if
you do not reduce your prices… Don’t forget to refer to my first Tip... in that case!
 Should there be specification changes that impact prices, Good Luck! Most of the time:
o There will be a clause which will state that the supplier has to incorporate the changes and support
production, even though a price adjustment has yet to be negotiated…
 No obligation on buyer to negotiate quickly

 Buyer procrastinates in addressing these legitimate claims
 Buyer will ask for all kinds of justification evidence…
 … then buyer is changed… and we start all over again with justification requests and
explanations to the new buyer, hoping the “frustrated” supplier will basically give-up!
o All this resistance because increasing costs, even if justified, goes against the main objective of
reducing costs… and that the buyers do not have any discretionary margin to negotiate increases
and know that their bosses won’t approve of any such changes…, if not pressed to do so!
 Aeronautics customers, even if they grew to become huge corporations through mergers and
acquisitions, act like they are very poor!
o To demonstrate to the stock markets how “good” they are at managing cash…, they will stop
paying suppliers well in advance of the end of their financial quarters in order to generate
liquidities!
 … even if the negotiated payment terms are already outrageous at Net 90 or Net 120!
 To those who dare complaining, don’t be surprised if you are told… “Are you in financial
difficulty?” or “We may need to look at your financial statements…”
 As for on-time deliveries and quality, I do believe that some performance penalties are in order so
that the suppliers do indeed keep their focus on serving the customers.
o However, the penalty clauses, as they often are in buyer contracts, cannot be open-ended and
most of all cannot be such that they could severely impact the financial health & viability of the
supplier.
Finally, everything has been put in place by the customers to remove as much authority as possible to the
buyers and their supervisors for price change negotiations and approval processes include other
departments to make them heavy and complex. Buyers and their supervisors, even if well intended, do
understand and won’t fight the internal machine for their suppliers… so that they do not negatively impact
their internal career path!
In following Tips, we will see how we can tackle these tactics.
Meanwhile, always remember that you are in business to make a reasonable profit!

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NEGOTIATION TIPS – AERONAUTIC INDUSTRY

 Improve quarter to quarter financial results

These corporate objectives translate into these Supply Chain objectives:

 Put a large % of their total spend on long-term contracts (90%+)

How do these objectives impact you?

o Then, you refer to my first Tip…

 No obligation on buyer to negotiate quickly

In following Tips, we will see how we can tackle these tactics.

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