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:

  • Reduce COGS by X% across the board (volume leverage).
  • Lower per-unit landed cost for high-velocity SKUs (focus on lead time and freight).
  • Improve working capital by moving to consignment or vendor-managed inventory (VMI).

    • 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:

  • SKU-level landed cost breakdown: unit price, packaging, duties, freight, handling.
  • Demand forecast by SKU for the next 6–12 months and your forecast accuracy history.
  • Current lead times, on-time-in-full (OTIF) performance and quality defect rates.
  • Supplier concentration by spend and alternative sourcing options.

    • 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

  • Forecast accuracy & visibility: Share rolling 12–24 week forecasts and agree on buffer rules. Better visibility reduces supplier safety stock requirements and can unlock lower MOQs.
  • Order cadence: Consolidate orders across SKUs or facilities to increase average order sizes and reduce per-unit freight and handling.
  • Packaging optimization: Re-design pack sizes to improve container utilization. A small change in inner pack can drop landed cost materially.

    • Contractual levers

  • Tiered pricing by volume: Negotiate stepped unit prices tied to cumulative volume over a defined period, not just per order.
  • Flexible lead-time windows: Agree on a delivery window with premium for expedited shipments and a lower price for normal windows. This lets you trade small schedule flexibility for cost.
  • Shared risk clauses: Include cost-sharing for raw material price shocks (with caps) to avoid sudden margin erosion while keeping supplier sustainable.

    • Financial levers

  • Extended payment terms in exchange for price: Offer longer DPO or early-payment discounts. For example, pay net-45 at a 2% rebate vs net-30 with no rebate.
  • Volume guarantees: Commit to minimum purchase quantities across a period in exchange for unit discounts.

    • Lifecycle levers

  • SKU rationalization: Reduce complexity by identifying low-volume, high-cost SKUs to phase out or migrate to configurable options.
  • Design-to-cost: Work with suppliers on early-stage product redesign to lower parts or assembly costs without impacting lead time.

    • How I structure the negotiation

    I follow a simple sequence that protects lead times while extracting cost improvements:

  • Start by validating performance (OTIF, quality) — this builds credibility and surfaces non-price issues.
  • Share your forecast and explain the business case: why improved terms help both parties grow.
  • Propose a package of changes, not just price: volume tiers, longer forecast visibility, packaging changes and payment-term trade-offs.
  • Document quick wins (e.g., packaging change, consolidated shipments) and separate longer-term projects (design-for-cost, VMI pilots).

    • 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:

  • Hidden costs: Increased inspection, rework, higher warranty returns.
  • Capacity strain: Supplier may cut corners if volumes spike without investment in capacity.
  • Single-source exposure: Lower price at the cost of supplier diversification increases risk.

    • 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:

  • COGS per SKU (landed cost) vs baseline
  • OTIF and lead-time variability
  • Quality defect rate and return rate
  • Inventory days of supply and stockouts
  • Freight cost per unit and container utilization

    • Practical scripts I use

    When I open the conversation I use two short scripts depending on context.

  • For an incumbent supplier with good performance: “We value our relationship and want to grow with you. Given our forecast and a commitment to X volume, what pricing or operational changes could you propose to reduce our landed cost while maintaining current lead-times?”
  • When pushing for operational changes: “To lower freight and handling costs we’re piloting consolidated monthly shipments and revised inner packs on SKU A and B. Are you able to run a 60-day trial and measure container utilization improvements?”

    • 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.