How do you negotiate with single / sole source suppliers?
First of all we need to differentiate between these two types of suppliers:
Single source supplier. Although there are multiple options available, there is a decision to contract with only one supplier. This is often the case with long-term partnerships.
However, since there are choices and multiple vendors able to provide the desired product or service, the opportunity is to complete the appropriate strategic sourcing process. It will include competitive biding, negotiation, and selection of the supplier that offers best overall value or Total Cost of Ownership for the organization.
Sole source supplier. There is no other option but to go with the supplier which is the only source for the product, or service required by the organization.
Obviously, this leads to a much more complicated situation to deal with and negotiate.
Nevertheless, there are some possibilities to build a more powerful position for negotiation by planning well in advance and working closely with internal stakeholders to present a single front to the supplier. Here are some advices for true sole source situations:
Modify/Redesign, or at least give the supplier the perception that there is a real intention to do so to open the market. Of course it takes some staging and role-playing but results can be astonishing.
Identify the consequences for the supplier to lose your account
Determine the short- and long-term impact for the supplier of no-agreement.
Estimate both parties’ interests in the negotiation and trade on items that each one value differently.
Use leverage of a possible long-term contract.
Aggregate to leverage company-wide spend with a focus on possible other products sold by the sole source that your organization needs and for which alternate suppliers exist.
Disaggregate by a segmenting the very strict minimum for the sole source supplier and segregate the rest of the requirements for competitive bidding.
Finally, it cannot be more emphasized that most sole source situations are the result of internal stakeholders specifying a product or a service in a way that locks you de facto with a specific supplier. This occurs, when Procurement is excluded from the process of developing specifications. It is then very difficult to make the change at a reasonable cost. See chart below.
In order to prevent sole source situations from happening in the first place, never miss an opportunity to raise awareness among stakeholders about the consequences of not including Procurement in the early stages of product or service development, and apply a gated strategic sourcing process performed by multifunctional teams.
It is worth mentioning that, a hybrid organization that supports local operations and projects while ensuring the necessary transversal coordination on categories is the best protection against such costly situations.