Negotiation

Effective Negotiation

Key Concepts • Objectives of Negotiation – Quality – Fair and Reasonable Price – On-time Performance – Control – Cooperation – Supplier Relationship Management

• When to Negotiate

Key Concepts • Supply Management’s Role in Negotiation – The Supply Management Professional Acting Alone – The Supply Management Professional as the Negotiating Team Leader • The Negotiation Process – Preparation – Establishing Objectives – Identify the Desired Type of Relationship • Three Powerful Preparation Activities

Key Concepts • Face-to-Face Discussions – Fact Finding – Recess – Narrowing the Differences – Hard Bargaining • Techniques – Universally Applicable Techniques – Transactional Techniques – Collaborative and Alliance Negotiating Techniques • The Debriefing: An Incredible Learning Opportunity • Documentation

Objectives of Negotiation • • • • • •

Quality Fair and reasonable price On-time performance Control Cooperation Supplier relationship management

Five Prerequisite Criteria for Competitive Bidding

Dollar value must be large Specifications must be clear Market must consist of an adequate number of sellers Sellers must be qualified and want the contract Time available must be sufficient

When to Negotiate • When any of the five prerequisite criteria for competitive bidding are absent • When many variable factors bear not only on price but also on quality and service • When early supplier involvement is employed • When the business risks and costs cannot be predetermined • When a customer firm is contracting for a portion of the seller's production capacity

When to Negotiate • When tooling and setup costs represent a large percentage of the supplier's total costs • When a long period of time is required to produce the items purchased • When production is interrupted frequently because of numerous change orders • When a thorough analysis is required to solve a difficult make‑or‑buy decision • When the products of a specific supplier are desired to the exclusion of others

Bidding or Negotiation? • Recall the prerequisites to bidding… – Dollar value must be large – Specifications must be clear – Market must consist of an adequate number of sellers – Sellers must be qualified and want the contract – Time available must be sufficient • If any of these are not true, then negotiation is the best choice

Conditions Demanding Negotiation • Impossible to estimate costs with a high degree of uncertainty • Price is not the only important variable • Purchasing firm anticipates a need to make changes in the specification • Special tooling of setup costs are major factors

Negotiation Teams • Cross functional members • Supply manager frequently serves as leader • Overall strategy is required • Roles are defined • Mock negotiations are needed

The Negotiation Process 1. 2. 3. 4. 5.

Preparation Establishment of objectives Face to face discussions Debriefing Documentation

Preparation • 90% of the time involved in a successful negotiation is invested in preparation • The negotiator must: – Possess a technical understanding of the item or service – Analyze the relative bargaining positions of both parties – Have conducted a price or cost analysis – Know the seller – Be aware of cultural nuances – Be thoroughly prepared

Possess a technical understanding of the item or service

• Understanding of what is being purchased, the production or service process involved • Any issues that will affect quality, delivery, and the cost of production • Understand the item’s intended use, any limitations and the existence of potential substitutes • Be aware of any prospective engineering problems which may arise • Be aware of the item’s procurement history and likely future requirement

Determinates of the Seller’s Bargaining Strength 1. 2. 3. 



How badly the seller wants the contract How certain the seller feels of getting it How much time is available to reach agreement on suitable terms The seller’s financial status, backlog, volume of operations and trends; general market conditions ; Industrial in general . These information should be studied to determine seller’s bargaining strength and weakness The presence of an industry boom, increase seller’s position. When a seller finds itself in a recession or in an industry with excess capacity , its bargaining position is weakened

Know the Seller • Review financial data and articles dealing with prospective suppliers • Know how the supplier’s business is going • Know supplier’s representatives • Truly understand their wants and needs

The Thoroughness of Preparation • When possible , the negotiator should develop an estimate of the price and value levels for the items being purchased • Knowledge of current economic conditions in the market • Evaluate all relevant data and carefully asses their own and their supplier’s strengths and weakness

Establishing Objectives Related to Cost Positions • An objective position – Best estimate of what the seller's actual costs plus a fair profit should be • A minimum position – Developed on the premise that every required seller action will turn out satisfactorily and with minimum cost • A maximum position – Developed on the premise a large number of required seller actions will turn out unsatisfactorily and with maximum cost

Traditional Cost Objectives • • • • • • • •

Quantity of labor Wage rates Quantity of materials Prices of materials Factory overhead Engineering expense Tooling expense Administrative expense

Non-Cost Objectives • • • • • • • • • •

All technical aspects of the purchase Types of materials and substitutes Buyer‑furnished material and equipment The mode of transportation Warranty terms and conditions Payment terms (including discount provisions) Liability for claims and damage F.O.B. point General terms and conditions Details on how a service is to be performed

Other Objectives • • • • • • •

Progress reports Production control plans Incentive arrangements Patents and infringement protection Packaging Title to special tools and equipment Disposition of damaged goods and nonconforming materials

Identify the Desired Type of Relationship • The three primary approaches presented earlier in the book in Chapter 5 are: – Transactional – Collaborative – Alliance

• The desired type or relationship is strongly related to the negotiation tactics a negotiator should and should not use

Powerful Preparation Tools •

The Agenda

The issues should be discussed in the order of their probable ease of solution

• “Murder Boards” and Mock Negotiations Members of the murder board dissect the negotiation plan in an effort to identify avoidable problems; Mock negotiations are used to prepare for the negotiation through a simulation of what is likely to occur during face-to-face discussion • Draft Agreements •

The BATNA (Best Alternative to a Negotiated agreement)

The BATNA may be an alternative supplier, a decision to make, or incorporation of a substitute material • Reference Card a single document to which they can refer A Reference Card includes such items as negotiating traits, cost data, facts and issues, agenda, BATNA, etc.

Face-To-Face Discussions Establish trust is a key in effective negotiations

 Agree on a common goal or shared vision  Expand the pie  Use fair criteria that everyone can buy in  Capitalize on network connections  Find a shared problem or shared enemy (perhaps another supply chain)  Focus on future  Use shared procedures

Face-to-Face Discussions • Fact Finding Has a complete understanding of the supplier’s proposal using questions of a how, what, when, who, and why; gain a better understanding of both the supplier’s interest (not objectives) and the supplier’s strength and weakness

• Recess • Narrowing the Differences •

Hard Bargaining

Hard bargaining, the last resort, involves the use of take-it-or-leave-it tactics, Its use is limited to one-time or adversarial situations

Techniques • Universally Applicable Techniques • Transactional Techniques • Collaborative and Alliance Negotiating Techniques

Universally Applicable Techniques • Getting to Know You get to know the individuals representing the seller

• Use Diversions A joke or a coffee break

• • • •

Use Questions Effectively Use Positive Statements Be a Good Listener Be Considerate of Sellers

Transactional Techniques • Keep the Initiative • Never Give Anything Away without getting something Trade mutual concessions benefit both parties

• Frame the question “so you want alternative A or B” the professional negotiator responds “ those certainly may be viable options, but let’s develop some others”

• The Dynamics of a Transactional Negotiation

Dynamics of a Transactional Negotiation Figure 20-2

Minimum

Objective

Maximum

Buyer’s position Heart of Transactional Negotiation

Seller’s position Minimum Cost

Objective

Maximum

Sole-source Negotiation • Start negotiations by attacking the reasonableness of the seller’s cost breakdown, using his or her own prepared cost estimate as the basis for such challenges • Appeal to the seller’s sense of reason, pointing out the potential negative long-run effect • Fight force with force , by threatening to use substitutes, or to redesign or manufacture the product or service In the short run, the negotiator usually pays the seller’s price. In the long run, the negotiator works toward the development of competing sources, substitute products, and compromise with the supplier

Increase Competitive Status A supply manager can increase competition by :

 Develop new suppliers  Develop substitutes of raw materials or products  Make items in-house rather than buying them  Buy supplier’s companies  Provide tools, money and management to competent but financial weak suppliers

Collaborative and Alliance Negotiating Techniques

• Separate the people (negotiators) from the problem (quality, price) • Focus on interests, not positions • Invent options for mutual gain • Insist on using objective criteria • Benefits are not divided equally 60-70% of the benefits of a typical negotiated contract go to the more skillful negotiator, leaving 30-40% for the less skilled negotiator

Resolve Negotiation Deadlock • Go on to the other point • Diversion – a joke or a coffee break • “I see your position – now try to understand mine” • “You suggest a solution” • “We’ve come too far to get bogged down now” • Management is in a position to step in and revitalize critical negotiation

The Debriefing: An Incredible Learning Opportunity On completion of each negotiation, the team is required to conduct a 15-minute debriefing • Conducted by the negotiation team – A self assessment/evaluation • Debriefing must be done in a timely manner accurate and timely feedback • Identify what was done well • Identify what could be improved upon • Document lessons learned • Provide individual and team feedback

Documentation • • • • •

Subject Introductory Summary Particulars Procurement situation Negotiation summary

Hypotheses Regarding Negotiations • The more important the issue, the more likely it is that it will be negotiated face-toface • The more politically sensitive the issue, the more likely it is that it will be negotiated face-to-face • If either negotiator will be personally affected by the outcome, that person may want to conduct the negotiation in person

Hypotheses Regarding Negotiations • If the topic involves issues of firm sensitivity, such as trade secrets or core competencies, the negotiation is more likely to take place face-toface • Buyer-supplier relationships will be perceived as more distant, the more online communication and negotiation are used • Less formal planning will occur prior to online negotiations than for those conducted face-toface

Negotiating for Price • Price Analysis Negotiation – Negotiation time is shorter – Support of technical specialists is seldom needed – Pricing data are relatively easy to acquire – Lower-dollar-value items • Price Comparison • Trend Comparisons • Cost Analysis Negotiation

Characteristics of a Successful Negotiator • All realize that specialized training and practice are required to become an effective negotiator • All habitually enter into negotiations with more demanding negotiating objectives than their counterparts, and generally they achieve them • All are pragmatic and flexible in their capability to deal with different negotiation techniques from “hardball” to “collaborative” • All are included, or are destined to become included, among an organization's most highly valued professionals