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. Preparation
2. Establishment of objectives
3. Face to face discussions
4. Debriefing
5. 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. How badly the seller wants the contract

2. How certain the seller feels of getting it
3. 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 non-
conforming 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 Objective Maximum

Cost
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-to-
face
• 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-to-
face
• 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-to-
face
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