NEGOTIATION IN PURCHASING AND SUPPLY

1. Definitions of Negotiation

Negotiation can be defined as:

"To communicate with the objective of reaching an agreement by

means, where appropriate, of compromise."

Negotiation is the process of bargaining between buyer and

seller. The objective is to reach agreement on all terms and

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conditions of the procurement, including the "subject of the

procurement" and the price to be paid.

The classic definition of procurement reveals the five rights of

procurement, which are really the true preferences or true

interests of a procurement professional during a procurement

negotiation. At least, they are the minimum.

“Securing supplies, materials, and services of the right quality

in the right quantity at the right time from the right place

(source) at the right cost”.

The aim of procurement negotiation in its barest form is to

achieve these five rights.

2. When is Negotiation Applicable? Negotiation requires communicating, which may be in writing, by

telephone, or face to face. Face to face communications may be

informal talks or formal conferences.

Negotiations generally are used when:

There is no price competition.

The prices obtained through competition appear to be

irregular or excessive.

The prices cannot be established by catalog or in the market

place.

The prices are not set by law or regulation.

Negotiation is a key skill of the purchasing and supply

management professional. The ability to negotiate effectively is

so fundamental, that without it, an effective purchasing and

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supply management service cannot be provided. Although some

people have a natural flair for negotiation it is a skill which

not only needs to be learned through professional training,

coaching and experience but requires refresher training at, at

least, five year intervals.

Purchasing and supply management professionals should undertake,

or lead, any significant negotiation with suppliers required by

their organisation. Where someone else is to undertake a

negotiation, it is the responsibility of the purchasing and

supply management professional to ensure that they are properly

trained and prepared for the experience. There are reputational

risks for the organisation when an untrained individual

undertakes a complex commercial negotiation. Negotiation should

be part of most procurement exercises especially those which are

of high value, high risk or are complex. In some cases,

negotiation with approved suppliers is preferable to inviting

bids such as when the requirement is difficult to specify.

3. Purpose of Negotiation The purpose of negotiation is to obtain the goods and services at

a price that is fair and reasonable to both the contractor and

the state.

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Fair and reasonable price is not always determined solely by the

contractor's cost of performance. Other factors which may affect

the price include non-monetary advantages which may accrue to the

contractor or the contractor's need for business during a slack

period. Thus, a contract price may be reasonable under some

circumstances even if it is less than the contractor's normal

"cost plus a fair profit."

Under a formally advertised procurement, the competitive market

price (the price offered by the lowest bidder) generally is

considered a fair and reasonable price. The competitive pressures

exerted by sellers in a free and open market tend to guarantee a

reasonable price.

A negotiated procurement is necessary when the competitive

conditions of an open market cannot be obtained. In the absence

of competition, the use of price and/or cost analysis are the

most frequently used methods in estimating what a fair and

reasonable price would be. On a case-by-case basis, it is

difficult to tell what a fair and reasonable price would be. Many

factors contribute to this problem, including the indefinite

nature of many negotiated procurements, the variations in the

abilities of different contractors, and the large part played by

subjective judgment in price and/or cost analysis.

4. Who Negotiates? There are at least two parties to any negotiation. One party is

the representative of the state whose interest is to reach an

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agreement including a fair and reasonable price for the subject

of the procurement and any other requirements of the state, such

as timely delivery. The other party (the offer or contractor) has

different objectives and is motivated by factors which are of

greater interest to him (i.e., profit).

The negotiations may be conducted by either an individual or a

team. The use of a single negotiator requires the person to be as

knowledgeable as possible about all aspects of the procurement.

It eliminates at-the-table disagreements on the state's side and

prevents the contractor from attempting to split the state's team

and thereby undercut its position.

The use of negotiating teams is becoming more prevalent because

of the increasing size, complexity, and value of the equipment

bought by the state, especially computer systems. Some of the

factors favoring use of a team approach are the psychological

advantage of numbers, the need for expertise in various fields in

order to evaluate the proposal, and the advantage of having

experts able to counter the contractor's arguments and expose any

misstatements. Care must be exercised in the selection of the

team. Team members must understand their individual functions in

the negotiating process.

5. Types of Negotiation 5.1. Distributive Negotiations

Distributive negotiation usually involves people who have never

had a previous interactive relationship, nor are they likely to

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do so again in the near future. Simple everyday examples would be

when we're buying a car or a house. Purchasing products or

services are simple business examples where distributive

bargaining is often employed. Remember, even friends or business

acquaintances can drive a hard bargain just as well as any

stranger.

Secondly, when we are dealing with someone unknown to us, and

it's a onetime only occurrence, we really have no particular

interest in forming a relationship with them, except for the

purpose of the deal itself. We are generally less concerned with

how they perceive us, or how they might regard our reputation.

Ours and their interests are usually self-serving.

A distributive negotiation is a process that normally entails a

single issue to be negotiated. The single issue often involves

price and frequently relates to the bargaining process. It is

also referred to as ‘Win–Lose’, or ‘Fixed – Pie’ negotiation

because one party generally gains at the expense of another

party.

5.2. Integrative Negotiation

Everybody wins something (usually)

'Win - Win' negotiation is conversely often referred to as

Integrative Negotiation. Integrative negotiation is often

referred to as 'win-win' and typically entails two or more issues

to be negotiated. It often involves an agreement process that

better integrates the aims and goals of all the involved

negotiating parties through creative and collaborative problem

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solving. Relationship is usually more important, with more

complex issues being negotiated than with.

6. Preparation for Negotiation Every prospective contractor begins negotiations knowing more

about his own proposal than the state does. His representatives

at the negotiation know the assumptions underlying their cost

estimates, the areas where contingencies have been included, and,

more important, the actual cost or price level at which they are

willing to accept the contract. Only thorough preparation for

negotiation can help the state negotiator balance this advantage.

Preparation involves several important steps:

Gathering the facts.

Analyzing the facts and the many intangibles that will

affect the negotiations.

Establishing the state's negotiation objectives based on

this analysis.

Planning negotiation strategy.

Setting parameters (give and take).

6.1. Fact Finding

Once the negotiator fully understands what he is buying, his next

step is to analyze the contractor's price or cost proposal. The

proposal should be broken apart, and its elements subjected to a

more detailed examination. For example:

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The negotiator should establish the estimated cost of each

element of the contract to be used as benchmarks against which

the probable cost of performing the contract under the proposed

contract can be measured.

He will try to isolate the assumptions and judgments the offer or

actually has made in moving from the current situation to his

estimate of probable future costs.

Fact finding may be accomplished in several ways:

If the problems are clearly defined at present, it may be

possible to formulate questions to be asked and specific fact

analyses to be developed by the specialists in each particular

field.

Such preliminary conferences are not intended to end in an

agreement on anything, although a fact finding session could end

in an understanding or agreement as to the factual basis from

which the offer or forecasted the costs of contract performance.

Fact finding may be done as the first stage of a two-stage

negotiation session. This will allow the negotiators time to

evaluate the facts, establish objectives, and get necessary

clearance.

6.2. Negotiation Strategy

A primary goal of negotiation strategy is to strengthen one's own

bargaining position. Negotiation strategy may be simply defined

as the overall plan for conducting negotiations at the bargaining

table. Planning may include these determinations:

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The location where the negotiations will be held.

The substantive agenda for the bargaining session.

Whether to present a counter-offer and, if so, the timing of the

initial counter-offer and the relation this bears to the maximum

compromise that the state would accept if forced to do so.

The arguments the state will raise in support of its position.

The tactics the state may use to deal with the individual

personalities of the contractor's representatives.

Any other techniques the state may use to improve its bargaining

position, and thus secure an agreement with the contractor that

represents the best overall arrangement.

6.3. Negotiator's Behaviour

Most important are those aspects of the negotiator's own demeanor

and appearance that are within his control. He should ensure his

neatness and grooming, his punctual arrival at the conference,

and his bargaining table attitude. Of course, he may alter his

attitude to reflect changes in strategies and tactics, but he

should always:

Be polite, avoid unnecessary interruptions.

Use direct, clear, and simple language.

Summarize the proceedings at appropriate points.

Keep his emotions in check at all times unless, of course, he

wants to display emotion as a tactic.

It is important the negotiations be conducted in an atmosphere of

cordiality, friendliness, and mutual trust in which both parties

are strongly motivated to reach agreement.

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How the negotiator actually plans and conducts a negotiation is

his choice. There is not one way to do it. As with anything else,

he must establish his own style and do what comes naturally.

He may want to use different approaches with different companies.

In most cases, he should use different approaches with the same

company, particularly if he deals regularly and repetitively with

the same people. It usually is a mistake to become predictable in

approaches and reactions.

7. Techniques for Fairness There are many gambits and ploys available in negotiations. Each

deserves the most careful consideration. There is nothing wrong

with them so long as the negotiator realizes what he is doing and

doesn't lose sight of his objectives. These techniques are

summarised as follows:

Tactic Example of Use

Making the other party appear

unreasonable

"We've made concessions; now

isn't it your turn?" "If you

persist in this, we will write

to your president."

Placing the other party on the

defensive.

"How can you justify that

position--right now, it looks

pretty fantastic to me."

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Throwing the blame for

inability to compromise on a

third party.

"This would never get past our

contract review committee--

We'd be right back here within

two weeks, if I let this go

by."

The sugar-vinegar tactic. One team member takes an

extreme position on an issue

by contrast to which the

state's actual position

(stated by the negotiator)

seems far more moderate and

conciliatory.

Straw issue technique The build-up of an issue on

which the negotiator intends

to compromise then use it as

proof of his willingness to

concede though the other party

is unreasonable.

Walk-outs Availability of this tactic

depends on actual bargaining

position. Its misuse can

greatly weaken the position of

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the user. Correctly used,

however, it may discipline an

otherwise intractable company.

Recesses To restore communications

control, to dissipate an

emotional atmosphere, to

discipline the intractable, to

divert discussion from areas

in which the user is weak, to

plan adjustments in

negotiation strategy or

tactics, to analyze progress

of the bargaining session to

this point.

Time squeeze "It is Friday afternoon and

I've got to catch a plane."

Presenting alternatives Make offers in terms of

alternative combinations of

profit and contract types; or

alternative combinations of

profit and delivery terms.

Agreement and rebuttal "Yes of course...but..." or

"Yes for that very reason we12

feel..."

8. Some Negotiating Do's and Don'ts The following list repeats some of the ideas already mentioned

and, although not complete, gives the negotiator helpful hints

and reminders.

Do be discriminating. Accept a good offer. Don't feel you

always have to knock something off the offer.

Do fight hard on the important points, win the war not the

battle. Don't start fights you have no chance of winning or

which even if you win, would not be worth the fight.

Do remember you generally are in at least as good a

negotiating position as the company's representatives. The

resources of the state are extensive, and you can gain in

diversification of experience in doing business with many

companies what you may lack in depth of knowledge of the

single company's situation. The company usually needs your

business at least as much as you need his product or

service.

Do be courteous, considerate, and do what you say you will.

Have integrity.

Do know when to talk and when to sit and listen. Stop

talking when you've made your point, won your case, or reach

agreement.

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Don't dictate. You represent the state, but you are a

reasonable person.

Don't ridicule or insult.

Don't try to make anyone look bad or prove anyone wrong.

Don't be predictable in your approach.

9. Advantages of negotiation The advantages of negotiation include:

It is a relatively expedient method of obtaining a value for

money solution

It is a useful method of maintaining value for money in a

single source situation i.e. where there is no real

competition

It is useful when the requirement is difficult to specify

It is relatively inexpensive to undertake

It is flexible and not prescriptive

It should be confidential

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