2 FG negotiation basics - SDI Clarity...Direct Supplier Negotiation Workshop: Negotiation Basics Facilitator Guide Revised: 10/27/2005 Page 2 Leverage Exercise •Purpose of this exercise

Direct Supplier Negotiation Workshop: Negotiation Basics

Facilitator Guide Revised: 10/27/2005 Page 1

DIRECT SUPPLIER NEGOTIATION WORKSHOP: NEGOTIATION BASICS

Time: 1.5 Hours

After completing this section participants will be able to:

• Identify the 3 outcomes of negotiation

• Identify the benefits of “balanced” negotiation to Alticor and the supplier

• Describe the two philosophical approaches to negotiation

• Identify their negotiation “style”

• Identify the four conditions necessary for a negotiation to occur

• Identify items that are typically “negotiable” and “non-negotiable” at Alticor

Instructional Strategy

Facilitator-led group discussion and small group exercise.

Transition

State: “Now that you have an understanding of Alticor’s direct purchasing process, roles, responsibilities, and support, let’s spend some time discussing the benefits, outcomes, and philosophies of negotiation. This information will provide a foundation for the rest of the workshop.”



Leverage Exercise

• Purpose of this exercise is to identify who has the strongest position (i.e., who had the greatest leverage) and why

• What did this exercise tell us about gaining and keeping leverage throughout the negotiation process?

Leverage Exercise

Timing: 15 minutes

Show PPT slide #9, “Leverage Exercise.”

Purpose

Explain that the purpose of this exercise is to identify who has the strongest position (i.e., who had the greatest leverage) and why.

How It Works

Divide group into four teams.

Distribute the “The Smedley Saga” supplier background to two of the teams, and the buyer background to two of the teams.

Facilitator Note: these handouts are included at the end of this section.

Provide a few moments for teams to prepare, and select a representative.

Instruct each seller team to join with one of the buyer teams.

Provide up to 5 minutes for the role play.



Debrief role play, starting with the results of each role play.

Ask the participants what did this exercise tell us about gaining and keeping leverage throughout the negotiation process?

Explain that while this workshop examines many dimensions of negotiation, its running theme involves gaining and keeping leverage. The leverage we enjoy in any situation is gained well before actual face-to-face conferences. That is why we will be looking at the entire purchasing process, not just what happens when we sit at a table and bargain with our suppliers.



Negotiation Overview

Explain that in this topic we will discuss:

• The three outcomes of negotiation

• The benefits of “balanced” negotiation to Alticor and the supplier

• The two philosophical approaches to negotiation

Three Outcomes of Negotiation

• “Win-Win”

• “Win-Lose”

• “Lose-Lose”

Three Outcomes to Negotiation

Show PPT slide #10, “Three Outcomes of Negotiation.”

Explain that there are three outcomes possible in any negotiation. These outcomes are:

• “Win-Win” - both parties satisfy most or all of their needs

• “Win-Lose” - one party satisfies its needs, but the other does not (or feels they did not)

• “Lose-Lose” - neither party satisfies its needs

Ask the participants to share an example (business or personal) of each outcome.

Discuss probable reasons why each outcome occurred.



Balanced Negotiation

1. Achieve the lowest total cost

2. Create a positive and creative relationship

Balanced Negotiation

Show PPT slide #11, “Balanced Negotiation”.

Explain that a misconception about negotiation is that it only involves suppliers seeking the highest profit possible and Alticor seeking the lowest cost possible.

This leads to what is known as “Positional Bargaining,” which tends to be difficult, tedious, frequently harmful to relationships, and often fruitless (i.e. Win/Lose outcome).

Explain that every negotiation should have two objectives:

1. Achieve the lowest total cost from the supplier

2. Create a positive and creative relationship with the supplier

Explain that these “objectives” often seem contradictory; on one hand “achieving the lowest total cost” is assumed to involve pressure, intimidation and browbeating. On the other hand “creating a positive and creative relationship” is assumed to mean “soft” negotiating tactics, giving in, and overly trusting the supplier.

Explain that in fact, the two objectives are both compatible and interdependent. Too much of one and too little of the other inevitably works against both objectives. Intimidation tactics that create negative relationships cause suppliers to withhold ideas and cut corners, which in the long run is costly.

Overly generous or naïve negotiation aimed at “keeping peaceful relations”, sooner or later, motivate suppliers to take advantage of the company and raise costs and lower value received.



Explain that the benefits of “Balanced Negotiation” are:

• Price of goods and services

• Manufacturing and marketing competitiveness

• Quality and safety

• Speed and flexibility

• After sale support

• Greater end-user value

Explain that these benefits, in turn benefit both Alticor and suppliers:

• Good negotiation does in fact tend to keep the price of goods and services competitive, but “price” includes more than simply sheer purchase cost

• By lowering the acquisition cost of parts, materials, components, machinery, etc., the manufacturing operation becomes more competitive. This in turn makes our marketing efforts more successful

• Negotiating quality standards helps us in obvious ways, but simultaneously motivates suppliers to provide us top quality. The same is true of safety considerations

• Many negotiations include issues of speed and flexibility; i.e., “just in time” delivery. These are opportunities for both Alticor and the supplier to exercise innovation in order to work out mutually satisfactory contracts

• Similarly, after-sale service such as repair and maintenance can be and often are negotiation issues. An aggressive and intelligent buyer causes suppliers to find more effective and efficient ways to provide service after the sale

• In the long run, the ultimate beneficiary of good negotiation is the end-user customer, who enjoys the benefits of lower cost, higher quality, and more overall value



Ask the participants to describe specific examples of a) negotiation(s) that have benefited Alticor in the ways described, and b) situation(s) in which ineffective or nonexistent negotiation did harm to Alticor.

The Two Philosophies of Negotiation

• Zero Sum View

• Expanding Pie View

The Two Philosophies of Negotiation

Show PPT slide #12, “The Two Philosophies of Negotiation.”

Explain that the most common factor that impacts the outcome of a negotiation is your “world view” or overall philosophy. All of us subscribe to one of these philosophies in whole or in part, which in turn impacts your style of negotiating.

Two Philosophies

• Zero Sum View – Parties compete over the distribution of a fixed sum of value. A gain by one side is made at the expense of the other

• Expanding Pie View – Parties cooperate to achieve maximum benefits by integrating their interests into an agreement. These deals are about creating value and claiming it



Two Sisters Example

Review the following example with the participants to illustrate the concept of “balanced negotiations.”

State: this example is adapted from “Getting to Yes” by Fisher and Ury (1991).

Many of you may be familiar with the classic example of the two proverbial sisters that quarreled over a single orange. Each sister was adamant in getting a 100% of the orange, however after several hours of bickering they decided on splitting the orange in halve only then realizing that one sister was interested in eating the fruit and the other was interested in the peels for a Christmas cake.

Ask the participants which philosophy does this example illustrate?

Explain that this kind of viewpoint tends to breed either “cowards or killers.”

• The cowards try to avoid negotiating, or else negotiate in illicit, underhanded ways, because of their fear of losing

• The killers, who are determined to get their hands on all the value, tend toward brutal negotiation tactics. Their world is made of winners and losers

Ask the participants how you would negotiate if you subscribed to the “Expanding Pie” view?



Explain that such a viewpoint tends to breed more collaboration, inventiveness, and joint problem solving, in order to come up the maximum number of ways to solve problems and satisfy everyone’s needs.

This leads to what is variously known as “principled” negotiation, or collaborative problem-solving approaches. Done properly, this approach combines assertiveness or “toughness” with open-mindedness, listening, and innovation – again, “balanced” negotiation.

Ask the participants to share actual situations in which one or the other “view” was appropriate or inappropriate.

Transition

State: “Let’s take a look at the principals and values of successful negotiators. Each of you will have an opportunity to take a short questionnaire to determine your negotiation style.”



The Principals and Values of Successful Negotiators

• The 9 pairs of statements reflect either principles or values of successful negotiators

• Indicate which statement you most agree

• Explain how this principle or value has affected (or could affect) the way you negotiate

The Principals and Values of Successful Negotiators

Show PPT slide #13, “The Principals and Values of Successful Negotiators.”

Value Identification Exercise

Pg #10-11

Refer the participants to the statement pairs in their participant guides.

Explain that the 9 pairs of statements reflect either principles or values of successful negotiators. In some cases, you won’t really agree with either, but you should still pick the one you most agree with, since that represents which way you “lean.”

Ask the participants to indicate which statement they most agree with as well as how this principle or value has affected (or could affect) the way they negotiate”.

Facilitator Note: once the participants have indicated which statements they most agree with, quiz a few participants as to why they picked a statement and its effect on their negotiation style.

Pair 1

• “The more you give the more you get”

• “Winning isn’t everything, it’s the only thing.”

Pair 2

• “Stakes in the ground can be stakes in the heart.”

• “Give an inch and they’ll take a mile.”



Pair 3

• “Expect the best.”

• “Assume the worst.”

Pair 4

• “Negotiation ought to be enjoyable.”

• “Enjoyment is irrelevant.”

Pair 5

• “There’s no rush, take your time.”

• “The quicker you finish the better.”

Pair 6

• “Think outside the box.”

• “Stick to the issues.”

Pair 7

• “Ask, don’t tell.”

• “Tell them where you stand.”

Pair 8

• “Listen and watch first.”

• “Make them understand you first.”

Pair 9

• “Build your relationship first.”

• “Build your case first.”



Explain that the first statement of each pair reflects the principles and values of the most effective negotiators. This does not mean any one is necessarily superior in all cases. The key point is to remember that your true principles and values are your “natural” drivers.

Sometimes, but not always, you may be required to at least temporarily act against something you hold important and be flexible enough to act on a different principle of value.

State: “We will revisit this during day two.”

What Is “Negotiation Style”?

Explain that negotiating is only one of many activities, such as presentation, supervision, salesmanship, and parenting, in which we use certain personality characteristics, such as:

• Assertive or dominance

• Emotion

• Rationality

• Fact or idea orientation

Explain that each of us has certain dominant traits that impact nearly everything we do with others, negotiating included. All of us carry around certain important lessons based on our past experience. For instance, a person who has been “burned” several times by skillful but unethical negotiators is likely to be either very cautious or very aggressive in new negotiation situations. Similarly, someone who has discovered that questioning and listening are very effective ways to “win friends and influence people” is likely to do a lot of questioning and listening when negotiating.



What’s My Negotiation Style? Activity

• The value of the questionnaire is three fold:– Identify your “natural” or learned

negotiation style – Recognizing the style used by negotiating

counterparts – Identifying situations where you may need

to adapt your negotiation style to achieve a better outcome

What’s My Negotiation Style?

Show PPT slide #14, “What’s My Negotiation Style?”

Introduce the “What’s My Negotiation Style?” activity.

• I will distribute a questionnaire that reflects a combination of traits, skills and lessons

• The value of the questionnaire is three fold:

− Identify your “natural” or learned negotiation style

− Recognizing the style used by negotiating counterparts

− Identifying situations where you may need to adapt your negotiation style to achieve a better outcome

Facilitator Note: the questionnaire and answer key are provided at the end of this section.

Distribute the questionnaire and answer key.

Instruct the participants to complete the questionnaire and use the answer key to determine their negotiation style.

Allow the participants 10 minutes to complete this exercise.



Debrief Exercise

Controlling Style

Explain that a primarily dominant, driving, or controlling style tends to have the following attributes:

• Very direct

• Demanding

• Disciplined

• Logical

• Often has a “tough” veneer, shows little emotion, and would rather win than be liked

Expressive Style

Explain that a primarily emotional and imaginative style tends to have the following attributes:

• Outgoing

• Charming

• Thinks outside the box

• Is easily bored

• Seeks excitement and allies



Analytical Style

Explain that a primarily analytical, fact-oriented style tends to have the following attributes:

• Detail-minded

• Conservative

• Skeptical

• Rational and cool-headed

• Dislikes ambiguity or being rushed to decide

Amiable Style

Explain that a primarily amiable, people-oriented style tends to have the following attributes:

• Very concerned about good relations, harmony, and trust

• Avoids or downplays conflict

• Sacrifices for the good of others



Discuss the “natural” or inherent strengths of each style when it comes to negotiating as well as the natural or inherent weaknesses of each style with respect to negotiating. Bring out three key points:

• Your “natural” style may or may not be appropriate in a given situation. If you are very assertive, you’ll do well in situations that require assertiveness, drive, or “toughness.” In another situation, or with another person, that same aggressiveness could harm the negotiation process

• Try to understand your counterpart’s style. Each style involves many kinds of behavior you can use for clues. For instance, a person who tends to think and react quickly and decisively is displaying assertiveness. If at the same time they show a lot of emotion or feeling, you know you’re dealing with a person who uses an “Expressive” style. Similarly, if your counterpart seems thoughtful, careful and attentive to details – and also is very unemotional and “cool,” you’re probably dealing with an “Analytic”

• Given these observations, you should be able to make certain adaptations that serve to facilitate communication and gain more trust. For example, a Controlling style individual tends to respect directness, assertiveness, practicality, even bluntness. Even if those are not “natural” traits for you, it’s still possible to “shift” in the other’s direction. Doing so is not only helpful in terms of communication effectiveness, it is a form of professional courtesy



Four Conditions for Negotiations

• Mutually unsatisfied needs/interests

• Mutual freedom of choice

• Actual or perceived conflict

• Discussable conflict

The Four Conditions for Negotiations

Show PPT slide #15, “Four Conditions for Negotiations.”

Explain that there are four conditions that need to be present for a situation to be considered “negotiable”:

• Mutually unsatisfied needs/interests: Both parties must have needs or interests that are not currently satisfied. If one party is perfectly satisfied with the status quo, they will either refuse to negotiate or force the other party to concede

• Mutual freedom of choice: Both parties must have freedom to decide. If one party has only one option, they cannot even consider other options, which means they cannot negotiate. Rather they must insist on getting their way no matter what. This usually results in a “lose-lose” outcome

• Actual or perceived conflict: There must be actual or perceived conflict or differences. Obviously, if both parties agree with one another, there is no need to negotiate. (This is why a common negotiating “ploy” is to try and convince one’s counterpart that “we’re really in agreement”)

• “Discussable” conflict: The nature of the conflict must be such that it is “discussable.” Beyond a certain point, differences can become so serious that open warfare seems to be the only option



What’s Negotiable & Non-Negotiable?

• Process for changing specifications• Quality levels• Intellectual property ownership• Payment for non-conforming products• Sharing of confidential information• Indemnification• Shipping terms• Delivery schedule• Confidentiality agreement

• Length of contract• Minimum quantity to purchase• Maximum quantity to purchase• Capital ownership and price• Piece price• Piece price increases and

decreases• Specifications• Quality defect standards• Exclusivity• Product warranties• Governing law

Non-NegotiableNegotiable

Pg #18

What’s Negotiable and Non-Negotiable?

Show PPT slide #16, “What’s Negotiable & Non-Negotiable?”

Explain that the second piece of information that needs to be determined prior to negotiations is what items are considered negotiable and non-negotiable?

State: “The goal is to think about the “line” you need to draw in the sand in order to achieve the goals you’ve set for the negotiations. Obviously, these items can vary depending on the situation.”

Refer the participants to the following table in their participant guides.

Review the following table.

Typically Negotiable Typically Non-Negotiable

• Length of contract

• Minimum quantity to purchase

• Maximum quantity to purchase

• Capital ownership and price

• Piece price

• Piece price increases and decreases

• Specifications

• Quality defect standards

• Exclusivity

• Product warranties

• Governing law

• Process for changing specifications

• Quality levels

• Intellectual property ownership

• Payment for non-conforming products

• Sharing of confidential information

• Indemnification

• Shipping terms

• Delivery schedule

• Confidentiality agreement



The Smedly Saga: Supplier Background

You represent Sizzle Enterprises, a creator of custom sales incentive and motivational products and programs.

Yours is a $7 million/yr firm -- $ 1million of which is sold to Smedley Automotive, an OEM parts manufacturer.

You have been asked to meet with the Smedley promotional goods buyer you customarily see. You do not know exactly what s/he wants. You suspect it may be to negotiate a new contract, since your three year contract is due to expire in 90 days. This is probably what the call is about, since there have been no quality, delivery or other problems with this account. As a matter of fact, the owners of your family-held firm have received several letters of commendation from Smedley management, congratulating you on your reliability, service-orientation, and innovation.

In preparing for your visit, you’ve double-checked your sales and cost figures. During the 33 months you’ve been doing business with Smedley, they have purchased 14 different programs that provided your firm with more than $2.3 million: an average of more than $71,000/month. (As the Smedley buyer has sometimes remarked, “That’s a lot of trinkets and trash.”)

Your records indicate that your costs over this period of time have averaged $43,000/month, including design, creation, production, reproduction, shipment, and servicing costs (roughly 60% cost-of-goods). This COGS figure is significantly higher than for any other account, but management calculates that the volume of business from Smedley justifies the lower profit margins. (At the same time, management has indicated that they will not and cannot continue to serve Smedley Enterprises at anything less than the current 40% gross profit.)



The Smedly Saga: Buyer Background

You are a buyer for Smedley Automotive, an OEM automotive parts manufacturer. You are the chief buyer of sales promotion and incentive programs and materials (known in the trade as “trinkets and trash”).

You have two suppliers at present. One is Sizzle Enterprises, a family-held firm you’ve done business with for almost three years. They have been a pleasure to work with, because they are reliable, flexible, responsive, and also quite innovative. They are currently your number one supplier. They have a three year contract with you, which is due to expire in 90 days.

The second supplier is a specialty house that sells you only about $200,000 a year worth of products, mostly training-related with various achievement rewards for completion.

You asked the Sizzle sales representative to visit with you, but you did not indicate the reason. The fact is you have received an offer from an international motivation firm headquartered in Minneapolis to take over the business currently enjoyed by Sizzle as well as the specialty house. This firm looked at your current expenditures for motivational and training materials, and has offered to provide an equal quantity and quality of these for a price not to exceed $50,000/month. (When you questioned the firm’s ability to do this much work for such a reasonable price, they replied that their enhanced digital capabilities coupled with “lean and mean” operational management puts them in position to provide superior service at significantly less cost.) To sweeten the deal, the new prospective supplier said it is willing to accept a one year contract for $600,000, payable in monthly fees of $50,000 -- provided it qualifies for a subsequent three year deal if quality, creativity, delivery and service meet your standards.

You actually would kind of like to stay with Sizzle – but business is business! Unless they can meet the price you’ve been offered you’ll just have to replace them.



WHAT’S MY NEGOTIATION STYLE QUESTIONNAIRE

For each of the following statements, circle the one that best describes you.

1. My major concern in preparing for a negotiation is:

A. The maximum goal I can achieve.

B. How I can win over my counterpart.

C. The important facts and details that support my case.

D. How much I can trust my counterpart and not be “taken”.

2. My normal behavior when first meeting my counterparts is to:

A. Do or say something dramatic or surprising to get everyone’s attention.

B. Review the background facts on both sides.

C. Engage in social conversation to help people relax.

D. State my goals and insist on the same from my counterparts.

3. In the early stages of negotiation, I usually:

A. Ask a lot of pointed questions to make sure I have all the data needed.

B. Invite my counterparts to talk about their needs and interests, on a personal as well as

business basis.

C. Control what’s talked about as much as possible, and challenge anything I doubt or

don’t agree with.

D. Try to build the most convincing case possible for what we need and why it’s good for all

parties.

4. When my counterparts are talking, I usually:

A. “Listen between the lines” in order to detect feelings and nuances, and periodically

feed back what I’m hearing to they know I understand.

B. Challenge anything I don’t agree with so that my counterparts realize they can’t pull

any fast ones on me.

C. Try to capture the main ideas or themes, and think about ways to reinforce what’s good

and counter what’s not.

D. Push them for details and background facts, especially when their arguments seem

“fuzzy” or incomplete.



5. When I present information during a negotiation, I usually:

A. Get straight to the point with no frills.

B. Try to make what I say as memorable as possible.

C. Cover points one-at-a-time, thoroughly, however long it takes.

D. Express understanding and concern for my counterpart’s concerns as well as our own.

6. When we disagree on a key negotiating point, I normally:

A. Show my feelings and get pretty excited if that’s what it takes.

B. Become concerned about making any mistakes, and insist on reviewing the facts.

C. Encourage my counterparts to explain the rationale for their position so that I understand

them completely.

D. Keep repeating what I’m after until they give in.

7. My typical reaction when negotiation is not going well is to:

A. Focus on available facts and look for viable alternatives.

B. Feel I’m being attacked personally.

C. Threaten to stop the whole process.

D. Call in allies and storm the trenches if need be.

8. When I feel it’s time to decide, I’m most likely to:

A. Ask my counterparts if they’re ready to make a decision.

B. Announce my decision in no uncertain terms.

C. Show my counterparts why it’s to their own advantage to decide on an outcome.

D. Stop talking until it’s obvious we should make a decision.

9. I tend to make decisions based on:

A. What will work.

B. Gut feel.

C. The facts.

D. What’s the most fair.



10. If someone does something sneaky or underhanded in a negotiation, I:

A. Throw a fit.

B. Quietly expose them with facts.

C. Feel cheated.

D. Plan my revenge.

11. In negotiation as in life, I am primarily driven by a need to:

A. Be right.

B. Be accepted.

C. Achieve my goals.

D. Be excited.

12. When a negotiation is over, I am most concerned about:

A. Was it fair to everyone?

B. Was it done by the rules?

C. Was it interesting?

D. Did we win?



WHAT’S MY NEGOTIATION STYLE ANSWER KEY

For each question, identify the letter of the response you circled, and then total how many items are circled in each column.

The column with the highest number of items identified represents your dominant negotiating style – and most likely your overall most common method of thinking, communicating, and deciding.

Question # Controlling Style Expressive Style Analytical Style Amiable Style

1 A B C D

2 D A B C

3 C D A B

4 B C D A

5 A B C D

6 D A B C

7 C D A B

8 B C D A

9 A B C D

10 D A B C

11 C D A B

12 B C D A

Total for each column.

Documents

2 FG negotiation basics - SDI Clarity...Direct Supplier Negotiation Workshop: Negotiation Basics Facilitator Guide Revised: 10/27/2005 Page 2 Leverage Exercise •Purpose of this exercise