I’ve negotiated dozens of supplier contracts across product launches, SKU rationalizations and scale-ups. Reducing cost of goods sold (COGS) is one of the fastest ways to improve margins, but the common trap is chasing price and breaking lead times, quality or supplier relationships — which ultimately increases total cost and risk. Below I share the pragmatic playbook I use with teams: how to prepare, what levers to pull, and the contract structures that lower unit costs without creating supply pain.
Start with the right problem statement
Before you ask for a discount, be explicit about the objective. Are you targeting a percentage reduction in COGS, a fixed margin improvement, or a target landed cost per SKU? The negotiation approach differs:
Define the metric you’ll track (gross margin impact, days payable outstanding, lead time variability). This keeps conversations with suppliers focused and measurable.
Preparation: data and BATNA
Good negotiations are data-driven. Here’s the minimum I expect to have before I pick up the phone:
Then establish your BATNA (best alternative to a negotiated agreement). If you can’t get improved terms from Supplier A, what realistically happens? Move to Supplier B? Absorb a temporary margin hit? Having a credible BATNA increases your leverage and prevents overreaching.
Levers that reduce COGS without harming lead times
Price is only one lever. I classify effective levers into four groups: operational, contractual, financial and lifecycle. Here are the practical moves I use most often.
Operational levers
Contractual levers
Financial levers
Lifecycle levers
How I structure the negotiation
I follow a simple sequence that protects lead times while extracting cost improvements:
Framing matters: I sell outcomes, not discounts. “If we can achieve X% lower landed cost, we’ll commit to Y volume” is far more effective than “give me a lower price.”
Negotiation template: key clauses I use
| Clause | Purpose | Example / KPI |
|---|---|---|
| Tiered Pricing | Reduce unit price as cumulative volume increases | Unit price drops 3% at 10k units, 6% at 25k units (12-month cumulative) |
| Forecast & Flex Window | Provide visibility while allowing schedule flexibility | Rolling 12-week forecast; +/- 2 weeks delivery window without penalty |
| OTIF SLAs | Maintain lead time performance | 95% OTIF target; failure triggers corrective action plan and fee cap |
| Raw Material Pass-Through Cap | Share commodity risk | Pass-through allowed for >5% raw material price swings, capped at 3% per quarter |
| Packaging Optimization | Improve container fill, lower freight per unit | Supplier agrees to trial new inner pack within 60 days; measure container utilization |
Pilot first, scale later
I rarely implement a full contractual overhaul across all SKUs immediately. Instead I run pilots on 2–4 high-volume or high-cost SKUs to validate assumptions (packaging redesign, tiered pricing mechanics, VMI). Pilots should have clear KPIs and a timeline — typically 60–90 days to measure landed cost impact and lead-time performance.
What to watch for (risks and red flags)
Even well-intended cost reductions can backfire. Watch for:
Mitigation is straightforward — include SLAs, audit rights and phased volume increases tied to performance.
KPIs to track post-negotiation
Don’t stop at signed contracts. Monitor these KPIs weekly and review monthly with suppliers:
Practical scripts I use
When I open the conversation I use two short scripts depending on context.
Negotiating supplier contracts is a cross-functional exercise: operations, procurement, finance and product need to be aligned. By approaching suppliers with data, a clear BATNA, and a package of mutually beneficial changes — plus pilots and KPIs — you can reduce COGS without compromising lead times or quality. If you want, I can share a checklist or a ready-to-use contract clause pack I use when running supplier pilots.
