When you know what the buyer requires or what the supplier wants from the deal, then it becomes easy to negotiate and strike a deal.
The problem arises when a broker is involved.
Amateur brokers tend to think they know what the buyer or supplier is likely to say and therefore they make decisions on behalf of the party they are representing.
For example, when I speak with amateur brokers (who represent the buyer), I can tell from an early stage that the deal is not likely to go through, because the broker is establishing strict and rigid rules, thinking that this is what the buyer really wants.
In reality, I know that this may be what the buyer told the broker in the first place, but I also know that the buyer always tries the easiest rules first, which are always subject to negotiation.
Most often, buyers will change requirements according to what the supplier is able to offer.
Take this scenario…
A buyer gives his requirements to a broker, to find a supplier for flour.
He stipulates that he will pay $190 per ton and that he will only pay with a letter of credit (LC) after 90 days.
Here, the buyer is trying to get away with 3 difficult things. If he can get away with it, he’s lucky. If he can’t get away with it, he loses nothing. It’s not even costing him any effort because the broker will be the one who will spend his time looking for the item while the buyer relaxes.
The buyer knows that the actual price he expects to pay is between $240 and $290, but he wont reveal this to the broker at this stage because he wants the broker to secure the lowest possible price, under his expectation. If the broker comes back with a price just below $250, the buyer can then negotiate. Anyhow, the buyer is trying to get away with a price well below expectation.
Secondly, the buyer has stipulated that he can only pay by LC.
In reality, buyers who stipulate 100% LC, will also accept SBLC or BG. They are not always set on LC one hundred percent of the time. Yes, you may get the odd few who wont budge, but more often than not, buyers will accept SBLC or BG.
SBLC is almost the same payment method as LC but with a slight variation. BG allows the buyer to issue a bank guarantee (much like LC) and yet pay when the goods reach the destination port. Either way, buyers are happy to switch to this option when they are told that this is the only method acceptable to the supplier.
Thirdly, the buyer has stipulated 90 days LC. This means the buyer wants to pay after 90 days.
Almost 95% of suppliers wont accept this, but buyers try it anyway. Buyers know that they will end up having to release the LC when the bill of lading is presented but they try the 90 day requirement in an effort to see if they can get away with it. After all, they lose nothing by asking a broker to secure a deal under these terms.
If you look at the whole situation from a 10,000 foot view, you can see that the buyer is taking full advantage of the broker, because the buyer loses nothing and the broker risks his precious time. If the broker pulls it off, the buyer benefits, and if the broker doesn’t pull it off, the buyer loses nothing (because he probably gave the requirements to other brokers, with less stringent requirements to see if one of them proves to be fruitful).
Now think about the broker who has the full set of strict requirements. He’s so happy that he has a buyer who he could profit from. He’s going to try his best to find the best deal for his buyer. So he sets off to look for a supplier.
When he starts talking to suppliers who can’t meet one of the 3 requirements, he simply rejects them and moves on.
Little does he know that he will never ever find a supplier that can fulfill all 3 of his requirements. If there is a supplier that is willing to match his requirements, it will be less than 1% of total suppliers for that commodity, and the broker is highly unlikely to find him.
So when the broker talks to suppliers and the supplier tries to reason with the broker, the broker thinks of his buyer’s requirements, and rejects all aspects of being reasonable. He simply wants what his buyer has instructed him to source and nothing else will do.
The supplier pleads with the broker to just talk to the buyer and see if he will accept this xyz alternative to his proposal, but the broker remains stiff and adamant, saying “I know my buyer and I know he wont accept this“.
Here, you can see the broker is cutting off his own hands when he takes decisions into his own hands. He thinks he knows what’s best for the buyer or that he is acting in the buyer’s best interests. Yet, all this time, he doesn’t know that the buyer sent him on a wild goose chase and that his requirements were designed to be negotiated and not stuck to vehemently.
So with amateur brokers like this on the loose, deals will continue to fail and the market will become saturated with pointless talks and negotiations by brokers who don’t know how to consult their buyers for every decision.
Amateur brokers are their own worst enemy!
Global Procurement Consultant