Welcome back to the NEGOTIATEx podcast! We are continuing our discussion with Gary Ortiz, global sourcing manager at Sonos Inc. and a highly experienced negotiator in the consumer tech space. If you haven’t checked out Part A of this series, then you should before going through this podcast summary.
On today’s episode, Gary speaks about negotiation practices that revolve around should-cost modeling. In his industry, the scope of negotiation lies between understanding all the projected costs following the reliability of the data, and the final figure being reasonable for all the parties involved.
Gary reminds us that the type of negotiation strategy deployed depends on the nature of business and the tier at which it is occuring. For example, consumer tech companies that ship larger volumes are considered to be Tier A as they are directly working over the supplies with clients and customers. Gary has spent the majority of his time at Sonos developing cost tools, which often makes him feel like a Wall Street analyst. The idea is to be prepared with all the important things that might be needed for a crucial round of discussion. Gary correlates this experience to a rafting trip where one can prepare with life vests and helmets for problems that can realistically arise.
When a manufacturing process is being conducted, the nodes and pieces of information are taken from the supplier. Depending on the supplier, the technological node, the type of information it stores is all processed. The next step is buying support pieces in quantities of tens of millions so that it can go right to Silicon. As he explains the idea of ship cost modeling with examples of his industrial work and insights, Gary reiterates the importance of factoring in the costs over the lifetime of the product.
For Gary, negotiating has always been something of a challenging journey provided his line of work. At Sonos, Gary did try to get a custom part number where he dropped the cost a further 20% as it was important for the company as well as needed at that hour. Thus, negotiating requires both parties to arrive at a fixed price which not only saves the company’s profit but also helps in managing costs better.
Gary tries to find a balance in being creative and being able to negotiate better by using various tactics. Since his company operates on the bleeding edge of technology, it’s important to be equipped with all the resources such as allocation of better pricing and different strategies to make the negotiation better and smarter. In the end, it’s like a massive game of chess that people are still trying to figure out.
Like in chess, the best players might “lose” at a negotiation once in a while. Even though it’s important to stay hopeful of success, “hope” is unfortunately not the most bankable strategy. Therefore the idea is to be less affected or dismayed when things do not go according to plan, because things are bound to happen. Gary speaks about learning from mistakes because mistakes cannot be committed for the second time.
As Gary reminds us, the company came down to $300,000 worth of NRA, which was a hard pill to swallow but in the end, it was a lesson learned by the whole team. Every negotiation that Gary has ever handled has resulted in a lasting friendship between the two parties. Negotiation is more like a group effort where the credit of work is not taken by an individual but it’s a team deliverance to get the deal.
As it is, negotiating is not only about managing costs but also making friendships where someone will take care of the work and maintenance. These are some of the most important relationships to have in the longer run. Because often, there are few people who will control these high collaborative groups and relations to be a part of something much wider while negotiating. In the end, relationships are surely the key to creating a great bond and negotiating better than ever.
All of these don’t mean that one doesn’t have to put the formalized documents and aspects correctly on the table. While negotiating, one can be the best word crafter which helps them to get any deal on the line, while being mindful of the people who are sitting in the room.
Gary Nolan and Aram discuss a lot more on today’s episode of the NEGOTIATEx podcast. Write to us at team@negotiatex.com and let us know, how do you feel about negotiating with suppliers in a post-pandemic world?
Thank you for listening.
Nolan Martin : Hey everyone, Nolan here. We are continuing our discussion with Gary. If you haven't already checked out, part A of this series, then make sure you go and listen to part A before you listen to today's episode.
Aram Donigian : We know one of the things we hear from other tech, folks in the tech industry are the importance, the criticalimportance of ship cost modeling. You know, how do you ensure that the modeling practices you follow that the data is fair, reasonable for all parties involved?So I guess I'm asking, you know, how are you aligning with best industry practices, objective standards, benchmarks, that sort of thing?
Gary Ortiz : I use the phrase. I just try to be less wrong than everybody else.
GO : Because it is the most difficult, the most complex commodity to try it is so non transparent. Okay. You know, and I think it's, we would consider ourselves a tier two tier three type supplier, right? The big folks, the fruit companies, and some of those other folks are tier ones, right? Those folks perhaps maybe have better insight into foundries and you know, some of the insights that are there, but you know, there are other ways. And in fact, I have spent a lot of my early years here at Sonos developing cost tools. And what I've come down to is there isn't one.We are analysts and just like a wall street analyst, right. Who somehow has correlated the tea leaves and you know, somewhere to the color of the grass and some other place and realizes those things correlate and this thing's gonna happen.
And they develop these models. That's where we are. So I've gone to a different approach. I use this analogy all the time. I pretend I'm going on a rafting trip. If I'm going on a rafting trip, right. You prepare yourself for all the things that you can realistically. So that as you go on your journey, you can, you can adapt or you can adjust to, to those things. So life vest, helmets, those kind of things. So with ship cost modeling, it's very similar. You are finding sources of truth that you can count on being consistent because the chip manufacturers are gonna do everything they can, to not really give you an absolute. So there are things that you can know in general, you know, a dye size, cuz you can do a scanning electron microscope. You can see the dye within the chip.
You can know the package that the part is in. If it's a plastic, it's got some metal pieces that come out of it or it's a ball grid. There is definitely a quantitative piece of that. But unfortunately, as we were alluding to before, there's so much intellectual property in these things that you have no idea how they're amateurizing or figuring all that out. Right. So in addition to that, how many times did they run the metal layer? You know, it's a $4 million process roughly for themto just do the first chip set, tape it out. And if they made a mistake, you know that the corrections are still in the hundreds of thousands of dollars to go fix that. Right. So you have to capture all that. So I think, I think long windedly answering your question, those are all the reasons why it's very difficult to, to really pin down what is- so basically you can come out with there's tools out there that we use to understand, like I said, the innards of a chip, right?
What node is it in? And these are pieces of information we also get from the supplier, where is it being manufactured? What's the node it's on. So the technology node, what nanometer, you know, node is being used, what it's is packaging. You can get some of those, that information. So you can get a general sense of what something is. But at the end of the day, it's like I said, you just want to be less wrong <laugh> and you know, you, you give them some numbers that you were needing to hit, right. And, and how can you get there? And so, yeah, I it's, it's a very difficult process. I thought, you know, for sure I could do this, I could just come in and I can say, well, I'm buying so many more of these and therefore I should get this print volume and prize don't necessarily line.
Well, they don't. And for certain commodities, for, for their passives, for what we call popcorn parts, you know, passive, like capacitors, resistors, you know, non, non, Silicon based type. Okay, fine. Those are buying in the tens of millions, billions of pieces, right. They the support pieces that go around the, the main Silicon chips. But the main Silicon chips is really difficult. Very difficult to cost, but important. And so I think in summary, basically we can get close and we can tell whether or not somebody is not giving us a fair price. And we use the tools that we have to, to challenge that. But I think it's people refer to, I think it's Moore's law, right? I dunno if you've ever heard of Moore's law where, you know, these transistors continue to double in its capability but the computer prices keep going down. That was the old way. So it's very strange, very difficult to, to really nail down a ship cost for some of these devices.
AD : Yeah. And if I go back to something you said earlier, as I'm listening to what you're saying, the importance then of the conversation: here's how we're getting there. Here's the information we have. You talked about getting some of that information from the suppliers themselves. That importance of the relationship established up front would seem to impact your ability to do refinement around cost.
GO : Yeah. It is. And the other way to look at it too, is cost over time. You know, these projects, these products, our life span for some of these products, seven to 10 years. Right. I mean, and, and so it's, it's, if you're not getting it on the way in, depending on where it is and it's technology life cycle, that's another piece, right? That's if it's brand new, of course, they want to get as much margin as possible. The other thing that I find too with these is ensuring that you can protect your contract price, meaning a lot of times, what I find is suppliers will give you a better price if you can mask the price so to speak.Mask it, meaning maybe I buy two or three chips from them. And I just pay a set, a price for the set of those components.
Therefore they can give me a lower margin. And the reason that is right, nobody wants their contract price out there. Cuz your contract price is under NDA, is very confidential. And if I was able to negotiate a better price than everyone else, they don't want the supplier does not want anybody else to know that. And the way our model works is we do all the design and then we hire a company, a factory to go manufacture to our specification. Well, they go do the buying, they're not only buying for us. Right. And so therefore when they see my contract price and it's lower than everybody else's contract price for maybe the same component, right? They start to try to use that to their advantage. And those are things that we have to be very, very careful of.
There's a variety of things you can do. And I think that's another important point to make is there's oftentimes ways when you can't meet, you knowon what you want versus what they are asking for, what are the, what are those gaps? Why is that? And sometimes you find is like, Hey, now this is so important to us. It's just coming out and we can't do that because then everybody's gonna want that price right away. And so that actually was one of my, moments at Sonos where I did that. I did a custom part number with a company to get a further 20% drop in cost that nobody else had. And I was able to enjoy that for a period of time. And it's something I hadn't thought of before. And it's just, you know, the chip has a number on the outside of it. They all look the same. Just, the numbers are on it that look different. I now use that as part of my repertoire as is, Hey, can we go custom number? Can we mask, can we do? And now's surprised to learn that that is another angle to try to get your ship cost and their cost the same.
NM : That's an awesome example of being creative there, Gary. But I think this also lends to a segue here and it's a lot of the common pushback that we get from our tech clients. And that's when they're dealing with sole-source manufacturers for their products or these chip manufacturers who may be stuck having to use what we often hear tech clients say is, well, we just don't have an alternative. We don't have, there's nothing we can do. We have to go with this. So I was trying to get your insight on if there's anything that you can do strategically or tactically so that you better your alternatives, whatever they are.
GO : I think we always have a choice. We always have alternatives. It's just a matter of how much money and time do we have, right? And that's the root of everything.Take radios or platforms,there's a lot of man hours, you know, people time put into these products, right. And having multiple relationships for those parts is difficult, but certainly not uncommon. And so I think there's a couple of things that we think about now, first and foremost, be in a position to, have an alternative.Just because you are sole sourced, with a particular supplier. First thing you need to do is make sure that your continuity supply and your allocation backlog, et cetera, strong, right? Because you never want to be wagged by your sole source. You wanna be in control of that. So first and foremost, you've gotta do that. If you don't do that, then you're really, and you don't feel like you have an alternative solution, you're gonna be in trouble.
So once you have that in place, then I think you have to get creative. There are ways of maybe not initially having two sources, but you know, alternate configurations is something thatwe start looking at and through our continuing sustaining engineering teams or other groups, right. If we can justify a lower cost part, right? We know it's gonna take a large effort, but at least you have something that you're working on. And it also serves a second purpose, which is your primary source now becomes aware that, you know, on our second iteration. So, use it to balance them. And I will tell you, it it's something that many of us have struggled because the, the amount of effort that it takes to, to develop some of these parts in your circuitry and the relationship that you have to have having multiple companies and multiple software teams doing that is not affordable all the time.
You know, you gotta get creative. And I think we've been very successful with that and in helping to balance that, because the only thing you have then to negotiate against, you know, cost downs or cost ups or anything, is the research that we referenced before. Whereas now, you know, if you have two players in the house that you can work them against each other a little bit and make sure that you're getting a better pricing, but there are some situations. And those situations are typically due to, like I said, high integration with each other, or somebody was the first mover into that technology space. And so don't take your eye off. It that's the other thing I would say is, okay, sole source this year company X was the first mover. We're there, we're on that bleeding edge of technology. Got it. That puts a target on that supplier. Everybody's gonna wanna get to that space, you know, so really monitor your AVL, monitor your allocation strategy, look at your sole source parts, you know, it's a continuous review because, sometimes those can be forgotten, cuz you think you've established, it's in the machine it's working. Everything's good. And then all of a sudden something in the world happens and you're like, uh-oh.
AD : Right. [laughs] the unexpected. Yeah. What I appreciate about what you just was talking about with this con continuous process is it really throws out the idea that you can approach these sorts of negotiations with any degree of linear thinking. You've gotta be looking at the layers. And as you're having conversations with supplier A here, you're doing internal things and you're also looking at what's happening in the industry. That's just highly complex.
GO : It's chess. I tell people that all the time, it's a massive game of chess that you're trying to figure out. And you just, again, like I said, you hope to be less wrong and put your, I shouldn't say hope. Hope is not a great strategy. You do all the things to put yourself in a position to succeed and at least be less affected by things that are out of your control. Cause things are gonna happen to us no matter what. And as long as we're in control of things that we could have been in control of and have good mitigations, we find ourselves in much better positions.
AD : So even in chess, sometimes you lose, this is, this is a tough question, but I feel like I can ask you this. You've been doing this for a while. Gary do you have an example of a negotiation failure that you've learned from and what you were able to learn and are you willing to share that with us?
GO : Yeah. You learn from your mistakes, right? AsI tell people it's only a mistake if you do it twice, [laughs], it's a learning the first time. And I say that very tongue in cheek, but it's important because there are people who that word failure is hard to hear, hard to take, for me the same. And so young team members and new team members, I always say, Hey, well, I guess we learned from that one, right. And as long as we don't do it again, I guess we learned.Early on, I think, you know, I thought I had this negotiation just solid and I tied it around. It was a rookie mistake. I tied it to a volume and I didn't do some research in terms of where the product was headed and the potential risks that were there and it didn't work out and we tied it to an NRA.
So, you know, they, they did this design couple hundred thousand dollars that they had and said, all right, well, we'll buy, you know, 2 million widgets. And after that we were square. And I think we only went on to buying like 800,000. Okay. Far miss.Big, big miss. So therefore what came due $300,000 worth of NRA, that was a hard pill to swallow, but it was a lesson that I learned, you know, that tying things to volume is a bad idea because the volume is dependent on so many factors outside of your control. And it was a single product skew. There wasn't a high, you know, if it's in, you know, several of your products, you can, you can throw a decent number and hit it. But it's not a good practice. And it's a practice that I have since never repeated. And it was hard to say, Hey, could you sign this? And in all fairness, I got my partner company that I was working with. They cut it in half cuz we gave 'em some new business. So you know, again, the whole thing didn't come due. So still a bit of saving grace, but it's still a moment that I'm not proud of.
AD : Yeah, no. Well, well thank, thank you for sharing that. Andwe would agree that we learned the most from failure [laughs] and it's also in terms of the example you chose, I feel like we hear variations of that from, from people even the thought that, well, I'll take, I'll take a cut now, but I'll make it up later, but later never happens. Andsothere’s some challenges there, you were so genuine there. I need to give you an opportunity. How about a success? How do you have a negotiation you think of like, that really defined success in a negotiation and why did you think it was so successful?
GO : You know, every negotiation that ends where I and my counterpart shake hands, I've never, I think making sure that that relationship is intact and very strong says that all the negotiations were positive.To point one out, I don't know. And besides which, when the successes are, those were team efforts.You know, those were not just me, I would not be comfortable taking any, taking credit for work, cuz it it's always a group effort. And, and I will say, you know, we have, we have been very good, but I, I don't know that I could point one out. Not to do the shameless Sonos plug, but again, if you look at the last two quarters of earnings, you can see,Sonos has have been very, very strong and we've hit our numbers. And our president has been out there touting on CNBC and all the talk shows that his sourcing team has really helped tremendously. So I think that that's success in itself in a very trying time for the world. I think that's success enough, I suppose.
AD : Yeah. No, and I think that's a great measure, right? When it translates both into I, you know, implementation. So from negotiation table to actual implementing, and then you're seeing that in terms of operational success, that's a great, that's a great measure.
NM : And you had mentioned team effort there, Gary. So are there things that you're doing to develop and grow your team to just help them become more aware of negotiations and how to have success in these negotiations?
GO : Absolutely. We’re always all doing that. The way we're split up is, we manage certain commodity types. So whether it's for me, connectivity and platforms, which are the CPUs or what power or memory, or, you know, break it up. Each of us are talking to various pieces of the world and we make sure that we align ourselves all the time and give ourselves that opportunity to, to learn from or work that. So we're always learning, we're always trying to improve. Absolutely. And it comes from all parts of the team for sure.
AD : So Gary, Nolan and I are always interested in how people are applying these, negotiation skills, how they show up in their own personal lives. Your bio shows that you spent time, on a little league board with a focus or as the head, right? The head of umpiring. Okay. Yeah. I would have to imagine that some negotiations showed up there. How does this show up in your own life?
GO : That is a funny story. So my daughter’s played softball. We have a very nice facility and so it was the right thing to do. And that was a really interesting time cuz now you have the most personal part of your life, right. Is before you, and I'm a coach and you know these umpires and you know, it's not about prefererential treatment or anything. And these guys know I'm scheduling them and I'm doing that. There was an instance where my little girlwas pitching at the time and she was having a bad day and you know, she was pitching and she hit this girl twice and the girl's grandfather was in the stands and he was, he was like yelling and screaming and I’m like, come on, man. [laugh]they're like, you know, 10 years old. It's not like she's over there trying to beat her, you know? And, and his granddaughter was, his granddaughter was very short. So the strike zone, the plate was like really tough.
AD : 😊
GO : The umpire threw the guy out. I did feel horrible. Right. And he came to me and I'm like, it's my daughter,I’m coaching the game. What a crazy instance that was. But I feel that I was able to stay very objective on that but I would say that was one of the most interesting things cuz you know, your mind and your heart are kind of in battle with each other and it's like, what do you do? But I mean, it was minor, but he was just, you know, how grandfather's gonna be.
AD : That's right
GO : That's, he's from New York too, which is great. So you can tell like, and I'm like, oh my goodness. So, but in my personal life, you know, constantly negotiating right now, my youngest, daughter's looking to go to college. She's a junior in high school. And we just did some tours. So, you know, we're gonna be focusing on her.My older daughtersat Auburn university in Alabama and she's constantly using it there or used it there she's, she's got into the honors college there. And so that was really great. So yeah. So we're, and let's face it. Like I said, my daughter, I think teaches me more about negotiating these days than, she, she has a very special spot. If anybody wanted to find my kryptonite, it'd be through my daughters. That's for sure. You know, I can, there's
AD : No doubt, no, our kids know us best. Right. I can relate to that, Gary. SoI learn, I learn so much from negotiating with my own kids too.
GO : Yeah. But you know, I will tell you back to the, to the little league thing, I think those of us that can have experiences globally and have experiences in a corporate setting;what I gave them in my short timethere is just the bigger picture. You're not just talking to this guy who's gonna cut your, do the lawn and maintenance or what have you, you know, these are important relationships to have, right. And I think it's oftentimes for many people on those boards, it's probably the highest type of collaborative groups that they're gonna do where they control large events and they can be shortsighted at times. Right. And, and I think that's something that I help them bring as a bigger perspective, you know, and that's just through my experiences and it's an amazing system. My daughter actually works there now she's the head of the field department where they feed people and that kind of stuff, while she's in high school, you know, so great, great program. I know I was able to help them and support them for my little time that I was there.
NM : That's awesome, Gary. And, and first let me say, thank you so much for being on this podcast. This podcast is all about elevating your influence through purposeful negotiations. So we start to wrap everything up here. Is there anything that we didn't ask you that you think has been important, uh, something that you wanna highlight for our listeners, uh, with respect to negotiations?
GO : No, I think you guys covered so much. In fact, you, you know, I was, I was glad to, to be able to prep these and take all this in, this was a great episode. So I really appreciate the experience. I mean, it was a great experience and I'm excited that you gave me the opportunity. I did wanna say, I did wanna say one more thing. Thank you, both for your service. You know, that is very near and dear and anyone who rings that bell. I have a brother who's Marine, another brother's Sergeant in the state police in New Jersey. And thank you to, to you guys, you guys really allow us to sleep peacefully at night and thank you for all your service. Really, really appreciate that.
AD : Yeah. Thank you, Gary.
NM : Thanks Gary. Appreciate it. Turn it over to Aram for closing thoughts.
AD : Yeah. So many great takeaways here. So, really appreciate Gary's time. There was a nice combination of relationship and the importance of relationship at the beginning of our conversation. How relationship is key. I think you said honesty, integrity, and trust. And then, you know, as we go from boardroom to ballpark, even at the end, being able to make that linkage and helping people, maybe broaden their perspective and think about how collaboration and the importance of these relationships can be. So I really appreciate that. I hope folks go back and really listen to how you manage alternatives. I thought that was really fascinating, right? Being in a position to manage them well, you know, really, looking internally, alternative configurations, having those conversations and then not taking your eye off things are happening in the industry. So this year might have to go sole source, that doesn't mean I have to do that next year. And that perspective I think is so helpful. And then I'll just finish with you what you said about the importance of prep, right? Who's in the room and that we're always better when we're able to bounce ideas off each other. So those are just kind of three key ideas that I pulled out of. I think so, so many Gary, so thanks again.
GO : Yeah. Thank you. You know, if I may, there was one thing I did want to just go back and mention. And that is relationship is obviously key. All of those things that we stated are great, that doesn't mean that we don't put formalized agreements or formalized documentation together. However, I think everybody should realize that if you're living in those documents, if you're pulling those documents out and said, look on page four, you know, you've already lost. And so I don't wanna dismiss the legal instruments thathave to be put in place. But I think everybody should know that you can have the best legal document. You can be the best word crafter there is. But if you're talking about that and arguing about that, everybody's already lost. There's only the people in the room that are winning are the lawyers, right? So it just, you know, be mindful of that. I think the power of the relationship, strong relationships, the legal thing has to happen. Right. And you hope to never bring those out, you know, because if you did all the other stuff has had to have already failed. Yeah. And let's face it. Nobody wants to be there.
AD : Perfect point. Yep. Agreed.
NM : All right. To our listeners. Thank you so much for listening today's episode. If you could please rate, review and subscribe to the podcast, both Aram and I would greatly appreciate it. If you have any questions or anything you want us to cover in future episodes, please send us an email at team at NEGOTIATEx. And we will get to that. If you are an organization like Gary's either big or smaller or the same size as Sonos, we are happy to take you on as client. We still have some client opportunities here for 2022, and we'd love to help you out. If you need anything, please don’t hesitate to reach out. Thanks for listening. And we'll catch you in the next episode.
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