Next level procurement negotiation in an infrastructure company
Unprecedented cost optimization through tailored negotiation approach
In a landmark initiative that highlights the effectiveness of strategic sourcing, an international railway logistics and wagon rental company, acclaimed for its leadership in the European market, has unlocked unprecedented cost savings through extensive procurement volumes. Specializing in wagon rental-including wagon construction, repair, and maintenance-rail logistics, and tank container rental, the company caters to a broad spectrum of clients from industries such as chemical and petroleum to automotive, paper, and consumer goods.
Logistics & Infrastructure
Objectives: Awarding high procurement volume amidst market constraints
Tasked with a procurement volume of multiple 100 million €, a venture deemed substantial by our standards, the company set out to acquire different freight rail wagon types, amounting to several thousand units in total. The endeavor faced significant market challenges, primarily due to the limited number of suppliers capable of fulfilling such large orders and further complicated by severe capacity constraints, intensifying the competitive landscape.
In light of these hurdles, the company’s internal benchmarks were initially quite conservative, reflecting the daunting market realities. To navigate these challenges, we were enlisted for our procurement expertise, tasked with managing the Request for Quotation (RFQ) process and steering subsequent negotiations. Given the high stakes and complexity of the project, the involvement of our Negotiation Excellence experts (NEX) was deemed essential, underscoring the strategic significance of this procurement effort.
Methods: Negotiation Excellence Unlocks Cost Savings: A Strategic Shift in Rail Wagon Procurement
The strategy initially centered on pushing for more competition among suppliers. Instead of limiting negotiations to current leading suppliers, we expanded the supply base to smaller suppliers. Even if our client still had to partially support them in their further development, this led to enhanced competitive dynamics and fostered better outcomes.
Our individually tailored negotiation strategy included the following awarding process elements that were transparently communicated to suppliers:
- Quote Confirmation: As we introduced a new quoting tool that reflected holistic like-for-like comparison of suppliers via Bonus/Malus, all suppliers were asked to confirm their latest quotes within the tool to ensure a common understanding of the starting positions.
- Target Lines: We challenged suppliers from the start by asking them to quote against strategically chosen target lines that not only anchored suppliers to be aggressive with their quotes, but also were the only way to guarantee qualification to further negotiation phases.
- Take-it-or-leave-it offers: We provided some suppliers with an opportunity to be immediately awarded certain wagon types if they were to accept our take-it-or-leave-it offers, and we withdrew the business from negotiations if the respective offers were rejected.
- Increasing Offer Chains: On the remaining wagon types, we conducted face-to-face Dutch auctions that allowed us to put competitive pressure on suppliers and, at the same time, to preserve relationships via in-person interactions.
- Volume Discounts: At the end, we gave suppliers the final opportunity to secure more business by allowing them to revisit their final offers and provide volume discounts that could have potentially led to re-allocation of previously awarded business.
The realized price reductions, non-revealed due to the confidentiality agreement, were notable given the initial market conditions and negotiation complexities. Remarkably, the entire awarding process was conducted in two days, one with virtual engagements and one with the whole day face-to-face interactions, a significant improvement over the six months previously required for similar sourcing activities.
To support the negotiation strategy, our KGM Strategy Data & Insights team developed an optimization model that accounted for all the existing constraints like different supplier capabilities when it comes to wagon types, their capacity and production line constraints, and many more. This case study not only demonstrates the significant cost savings attainable through strategic sourcing and negotiation but also emphasizes the importance of adaptability, innovation, and a deep understanding of market dynamics in achieving procurement goals.
Results:
- Achieved remarkable savings and unit price decreases
- Created transparency as a basis for negotiation targets
- Introduced a framework to help decide how to approach suppliers in negotiations and when to use negotiating power
- Implemented a sustainable negotiation process
- Undercut budget for awarded wagons
- Secured notable number of units despite dissonance between budget targets and market prices
- Set up new and revived old business relationships
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