Student Question

Should we use target pricing? Should we negotiate with our suppliers or except their existing terms and conditions? Should we estimate total cost of ownership for all our purchases?

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Whether firms should negotiate with suppliers or merely accept their existing terms and conditions depends on the situation. In a competitive situation, the firm can often bargain with the supplier to improve price or payment terms (or other factors) when there are multiple suppliers offering similar or the same merchandise. It is important to recall that negotiating is a time-honored tactic that is acceptable practice in many—if not most—marketplaces. Companies negotiate for many things, including the price of the supplies, status such as most favored customer, shipping terms, and when payment is due, among other factors.

For example, in a most favored customer clause (modeled after most favored nation clauses in trade agreements), the firm seeks to obtain the most favorable terms a supplier offers to any of its customers. Other negotiations center on price. Firms often seek volume discounts on the theory that the firm should receive favorable terms for placing orders that are larger than orders placed by many of the supplier’s other customers. The firm relies on its importance to the supplier’s total revenue stream to obtain negotiating leverage and improve upon the terms the supplier offered originally.

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