16-1McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 16

Negotiation

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Key Concepts• Objectives of Negotiation

» Quality

» Fair and Reasonable Price

» On-time Performance

» Control

» Cooperation

» Supplier Relationship Management

• When to Negotiate

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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

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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

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Key Concepts

• Online Negotiation

• Negotiating for Price

» Price Analysis Negotiation

» Cost Analysis Negotiation

• Characteristics of a Successful Negotiator

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Objectives of Negotiation• Quality

• Fair and responsible price

• On-time performance

• Control

• Cooperation

• Supplier relationship management

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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

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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

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Supply Management’s Role in Negotiation

• The Supply Management Professional Acting Alone

• The Supply Management Professional as the Negotiating Team Leader

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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

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Conditions Demanding Negotiation

• Impossible to estimate costs with a high degree of certainty

• 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

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Even if the previous list is met…here are two arguments for Negotiation

• The negotiation process is far more likely to lead to a complete understanding of all issues of the procurement

• Competitive bidding tends to result in sacrifices in product quality, development efforts, and other vital services

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Negotiation Teams

• Cross functional members

• Supply manager frequently serves as leader

• Overall strategy is required

• Roles are defined

• Mock negotiations are needed

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The Negotiation Process

1. Preparation

2. Establishment of objectives

3. Face to face discussions

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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

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Determinates of the Seller’s Bargaining Strength

1. How badly the seller wants the contract

2. How certain he or she feels of getting it

3. How much time is available to reach agreement on suitable terms

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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

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Traditional Cost Objectives• Quantity of labor

• Wage rates

• Quantity of materials

• Prices of materials

• Factory overhead

• Engineering expense

• Tooling expense

• Administrative expense

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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

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Other Objectives• Progress reports

• Production control plans

• Escalation/de‑escalation provisions

• Incentive arrangements

• Patents and infringement protection

• Packaging

• Title to special tools and equipment

• Disposition of damaged goods and off‑spec (non-conforming) materials

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Identify the Desired Type of Relationship

• The three primary approaches presented earlier in the book in Chapter 4 are: » Transactional

» Collaborative

» Alliance

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

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Five Powerful Preparation Activities• The BATNA

• The Agenda

• “Murder Boards” and Mock Negotiations

• Crib Sheets

• Draft Agreements

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Face-to-Face Discussions

• Fact Finding

• Recess

• Narrowing the Differences

• Hard Bargaining

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Universally Applicable Techniques• Getting to Know You

• Use Diversions

• Use Questions Effectively

• Use Positive Statements

• Be a Good Listener

• Be Considerate of Sellers

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Transactional Techniques

• Keep the Initiative

• Never Give Anything Away

• Frame the question

• The Dynamics of a Transactional Negotiation

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Minimum ObjectiveMaximum

Buyer’s position

Seller’s position

Minimum Objective Maximum

Cost

Dynamics of a Transactional Negotiation

Heart ofTransactionalNegotiation

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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

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The Debriefing: An Incredible Learning Opportunity

• 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

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Documentation

• Subject

• Introductory Summary

• Particulars

• Procurement situation

• Negotiation summary

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Online Negotiation

• Agreements founded solely on written communication tend to have problems

• Those that include written and telephone communication are sustainable

• The best relationships are those that go beyond other forms of communication to involve face-to-face meetings

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Advantages to Online Negotiation• Can help focus on the issues separately from

personalities

• Brainstorming may be more productive

• Online communication can free the buyer and supplier from location dependency

• If the negotiation is not being done “live” on the Internet, the time for conducting the negotiations is relatively flexible

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Drawbacks to Online Negotiation• Some of the drawbacks listed could also

be advantages, depending on the firm’s objectives and needs

• It is far easier to say ‘no’ in writing• Psychological separation makes the

termination of the relationship much easier

• Online negotiators are likely to feel a need to be more persuasive – more convincing

• A lack of nonverbal cues forces careful consideration of the impact of each word

• It is difficult to evaluate perceptions

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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

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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

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Negotiating for Price

• Price Analysis Negotiation» Negotiation time is shorter

» Support of technical specialists is seldom needed

» Pricing data are relatively easy to acquire

• Price Comparison

• Trend Comparisons

• Cost Analysis Negotiation

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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

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Concluding Remarks• Negotiation is free enterprise at its very best!

• Negotiation is a powerful supply management tool which competent professionals use to achieve maximum value at minimum cost

• By rewarding efficiency and penalizing inefficiency, the negotiation process benefits the negotiating firms and the nation's economy as a whole.

• The increasingly common collaborative approach to negotiations substitutes a win‑win approach for the more traditional, transactional one