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Finances

Cost of living crisis: negotiating with suppliers

With worldwide supply chains under pressure, the cost of doing business is rising for UK firms. We offer some practical information and tips that could help you and your business get a better deal from your suppliers.

Review your current suppliers
  • Establish who your most important suppliers are
  • Evaluate them individually
  • Analyse your current pricing
  • Set cost targets for each supplier

Looking closely at your essential suppliers, their prices and their performance is the first step in deciding whether you should make changes. Remember that inflationary pressures are affecting suppliers, too, and be realistic about possible savings in the current economic climate. It’s also important to know where your suppliers are based. Costs could be higher – and may rise more quickly – if suppliers are located in geographies that are more vulnerable to geopolitical risk, so understanding where there’s potential to near-shore or ‘friend-shore’ can help frame negotiations.

Understand the market
  • Are your suppliers’ prices competitive?
  • How many alternative suppliers are out there?
  • Are there alternative materials you could use?
  • Are materials prices likely to rise again?

It’s important to do your homework on the wider market before negotiating with suppliers. Find out if an increase in the cost of raw materials has forced your supplier to raise prices or if there’s another cost that might be being passed on to you. Also, do some research on the number of suppliers offering a particular product. The more suppliers there are, the more leverage you may have.

Make a plan
  • Know what you want to pay
  • Understand how changes will affect you
  • Suggest contract amendments
  • Arm yourself with figures

Do some calculations to determine how much you ideally want to spend with each supplier and set savings targets. Your discussion with your current supplier is more likely to be successful if you have a clear agenda, based on how your requests will positively affect your business, and the supplier’s business, too. For instance, they may agree to lower pricing if you agree to extend your contract term, which will benefit your business in the short term and the supplier in the longer term.

Negotiate with confidence
  • Remind the supplier you’re a good customer
  • Ask for more than you expect to get
  • Secure a locked-in price
  • Offer cash upfront for discounts

When it comes to negotiating with your supplier, don’t be afraid to request a deal more favourable than what you may finally expect to agree to. If you can afford to do so, be prepared to offer cash upfront in return for a discount. And during the negotiations, be polite and respectful of the fact that your supplier is also a business owner and has to pay attention to their bottom line, too. If possible, have your supplier commit to a locked-in price over a set time period that you know will improve your margins.

Shop around
  • Don’t accept the first offer
  • Find suppliers outside your region
  • Don’t underestimate goodwill
  • Be prepared to walk away

A supplier may pressure you to commit to an offer immediately, but it may be better for you not to do so. Take some time to think about it, and don’t be afraid to speak to competing suppliers to find out if there might be a better deal out there. Also, don’t limit yourself to suppliers in your local area. Companies in other regions may be able to offer a better price and might include shipping costs. You can walk away from a negotiation if you feel you aren’t making progress but remember that the best business relationships can take many years to establish, so think carefully before switching suppliers and losing the goodwill you’ve built up.

Proactively manage risks
  • Embrace resilience-first
  • Review supply chain management systems
  • Enhance transparency and visibility
  • Identify opportunities for further change

Risk management is best thought of as an ongoing process and there are things you can do to bolster the resilience of your supply chain long term. Investing in supply chain management systems could improve supplier transparency and help shine a light on vulnerabilities, so you may be able to better prepare, plan and adapt in the face of new disruptions. Reviewing your processes on a continual basis – from supplier onboarding and ongoing engagement to stock management and delivery procedures – could also help you identify new opportunities to improve your supply chain’s resilience to future rises in costs.

Support for rising costs

To help you mitigate the rising costs of living and trading, we’ve created a hub of resources. We’ll keep updating it as new developments arise and solutions become available..

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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