Remember Your First Date? When to Make the First Move …

While I can't speak for the personal youthful histories of Spend Matters readers, I was somewhat of a socially challenged teenager (weren't we all?) who felt lucky to get a date at all. But when I actually went out with some lovely lady, the question on my mind -- probably not to mention everyone other guy on the planet in a similar situation -- was whether or not to make the first move. There is, of course, a similar analogy when it comes to negotiating with suppliers -- to make the first move or not. A recent article in Supply Chain Digest cited research from Stanford University professor, Margaret Neale, which asks the question: when negotiating with suppliers, should you make the first move? Neale suggests that rather than practice conventional wisdom which suggests to wait for suppliers to make the first offer -- because "the tendency is to make a first offer that includes some concessions" -- that savvy buy-side negotiators should often "start with an offer that is just this side of crazy." The theory here is that by intentionally low-balling a supplier's expectation, the "buyer gains the advantage by defining the starting point to which the other side must respond."

Based on past anecdotal experience, I'm not entirely sure that I believe this suggested tactic is the best approach in competitive circumstances, given the game theory involved that often drives down price when multiple suppliers are at the table (and after a procurement organization has put forth their BATNA prior to an actual negotiation with all of the potential suppliers). Perhaps it's my FreeMarkets background, but I still believe that companies will get the best results in competitive market environments when suppliers are the ones providing transparent feedback (which others can see). And now that optimization technology from Combinenet, Emptoris, and others has gotten more sophisticated, the expressiveness of suppliers in the bidding process can create new savings opportunities that would be impossible for a sourcing professional to necessarily suggest or predict.

Obviously in situations where it is not possible to run this type a negotiation with competitive market feedback -- either a traditional reverse auction or an optimized event -- the approach that Neale suggests makes sense. But making the first move in and of itself can also be a limiting strategy, especially with more complicated categories with hundreds or thousands of line items. After all, aggressive target costing -- which is, perhaps, what Neale is suggesting, although she does not call it that -- is but one sourcing strategy in what should be a much more complete back of tricks. The key, of course, is knowing what tactics to deploy under what circumstances. This is not to say that I ever perfected this approach in high school under different circumstances, but I've certainly learned to be more flexible in my approaches over the years.

Jason Busch

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