Purchasing (BMK3748) Diploma in Business Management

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Chapter 15: Negotiations in Purchasing

Phases in Negotiations

1. Assessing the Negotiating Environment

It is important that you first assess the current situation prior to conducting actual negotiations.
Assessing the negotiating climate typically involves gaining an understanding of market
conditions for the particular commodity or service being purchased and the position of the
supplier in that market.
A market condition generally refers to circumstances such as the availability of supply in relation
to actual demand or the number of supplier in the market place available to create a competitive
situation.
It is important to assess the relationship with the supplier in order to help determining the
atmosphere during the negotiation and have an important impact on how you and your team
develop the negotiation strategy.

a) Competitive Environment
When the competitive environment is limited by the lack of qualified suppliers or by
intellectual property rights, competitive bidding is unlikely.
In these circumstances, negotiations may be the only way to achieve organizational
objectives.

b) Role of Market Forces
When analyst speaks of market forces, they generally refer to factors-economic, physical
and political influencing and affecting buying and selling at a particular time.
These factors may be exist within a specific industry or a geographical location or over
the course of an entire economy.

c) Early involvement
Early involvement by the purchasing group is one of the fundamental keys to employing
successful negotiation strategies.
The later the involvement of the Purchasing Department in sourcing decisions, the less
leverage will be available for negotiating favourable terms.
In other words, the greater the suppliers certainty that it will receive the order and the
less likely it will be engage in serious negotiations.
It is essential to avoid being locked into a single source prematurely without sufficient
negotiating leverage t influence critical terms of the contract.







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2. Gathering Information and Analysis
Information is power.
Having the right information available when needed is always critical to a successful approach to
strategy formulation.
It is important to know at least as much (perhaps more) about the conditions that may influence
the negotiations as the supplier.

a) Analyzing the Suppliers Situation
In gathering information, you might fist want to consider looking at the situation from
the suppliers point of view:-
What motivates their position?
What are they likely to value the most?
What concession might they be willing to make to achieve their goals?

b) Analyzing your Organizations Position
You will likely know a great deal more about your organization and its specific needs than
you will about your suppliers, so the exercise of gathering and analyzing your own
position will encourage your team to more clearly identify areas where concessions may
be required.



3. Preparing for the Negotiation

a) Selecting and Leading the Negotiating Team
Form a support team composed of technical experts, the financial group, and the
members of the user groups likely the same people that participated in the preparation
of the RFP and the supplier selection.
This should always be led by senior representative for Purchasing who is participating in
its activities to ensure that business objectives are met and that the negotiations are
conducted in an atmosphere conducive to continued collaboration.
The purchasing representative will also be responsible to ensure the negotiations are
carried out with integrity and in ethical manner.

b) Assessing the Teams Strength and Weaknesses
It is a good idea for the members of the team to jointly assess its collaborative strengths
and weaknesses in advance.
By doing so, team members will develop a more realistic understanding of the
constraints they are operating under and what technical skills are available to effectively
manoeuvre to a favourable concession.

c) Formulating Objectives and Developing Strategies
As a first step in developing the plan, team members should list the objectives and the
anticipated objectives of the supplier.
Under each objective, indicate the likely impact of not achieving the objective.
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Then rank the objectives on the list by priority, focusing on developing strategy for those
that are most critical.
The strategy will outline what initial offer you can expect and what you can counter offer
(also known as take-aways and give-aways.)
Your assessment of the situation, such as current market conditions, will play a critical
role in this process, for without it you will likely not be able to understand the suppliers
need and motivation.



4. Conducting the Negotiation

Climate refers to the physical aspects of where the negotiations are taking place, as well as the
general mood of those conducting the negotiations. It encompasses both the physical atmosphere
and the nature of the personal interaction.

a) Location
It was thought that there was a critical psychological advantage to hold negotiations in a
familiar environment.
Typically, negotiations are held at the buyers office.
If negotiations are conducted at your place, you will have the comfort of familiar ground,
as well as the convenience of having support staff and records nearby.
Regardless where you are, consider any potential negative impact the environment may
have and take whatever steps necessary to counter it.
As part of an awareness of your surroundings, you must also be aware of the body
language and the physical actions of those in the negotiations.
Learning to read these signs can be useful in determining the mood and status of your
suppliers team.

b) Developing a Collaborative Atmosphere
A collaborative atmosphere is the most conducive to negotiate in environments where
long-term relationships are important.
If your discussions are congenial and nonconfrontational and you listen well, you will
come away with an understanding very early in the negotiations of what exchanges of
value can take place.
You will benefit from good relations if you consider that the suppliers representative is
as anxious as you are to do a good job.
Remember the objective of any negotiation is to reach an agreement, so there is little
value in playing games.
Do not make decisions before you feel completely ready, regardless of the
circumstances.




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c) Allowing for Cultural Differences
When conducting negotiations with personnel from other nations, the most important
rule to remember is that cultural differences will invariably have an impact.
For example: the native speaker may have different conception of the terminology than
the person speaking a second language.
Body language and expressions take on different meanings in different cultures.
The only certain ways for you to understand this is to do homework diligently and
become familiar with as many of the nuances of the suppliers culture as you can.
Sometimes, it helps defuse this potential problem if you take the initial step of informally
discussing these differences together.


5. Adopting a Negotiating Style
2 basic types of negotiator:
Collaborative negotiators who seek to develop outcomes that enhance the sense of
accomplishment of both parties (win-win situation)
Power (or positional) negotiators who seek to prevail in achieving their objectives regardless
of the impact on the other party.
Even after you spend many years in purchasing, it is unlikely you will consistently use one or
the other.


Skills of Negotiations

1. Generally, more can be gained by listening than talking. Accordingly, take copious notes and
review them frequently.
2. Questions how your statements will align with your objectives.
3. Avoid accepting the first offer.
4. Always ask questions, especially when there is useful information to be learned.
5. Do not make concession without receiving equal consideration. This does not necessarily mean
that each and every concession need result in some consideration...but do keep track.
6. Attend to deadlines.
7. Keep your wits about you and avoid reacting emotionally.
8. Issues need to be prioritized.
9. Take breaks whenever you feel the need. Do not attempt to fight fatigue.
10. Refrain from bluffing and use only data you can prove.
11. Last and final offers should mean exactly what they say.
12. Understand and use body language as a communication tool to your advantage.