MIM 524Global Sourcing

Class Seven

Agenda

- Commodity Studies are Due- Negotiation Strategies from a Sourcing

Perspective- Sustainability- Starbucks Discussion- Current Events- Review of Final Presentation

Negotiation Strategies

The “Art” of Negotiations

You get what you negotiate!You negotiate for everything

CostCapacityTerms & Conditions/ContractEven Mind share…..

Data Verses StylePreparation is Key!

Understand the Competitive LandscapeBuyer’s Verses Seller’s Markets

Listening can be more important than talkingEthics is Critical

“Fine Print”Misleading intent of termsHighlighting errors or omissionsNon disclosure (Ex: Language skills)

Changing Dynamics of NegotiationsTeam negotiations are more common Margin Pressures leave little wiggle roomFrequency is increasingGlobal Impact – Language, Culture, etc. (See next

slide)Technology Impact IE: Reverse AuctionCompetitive Landscape may be restricted

Fewer SuppliersSole Sourcing

Cultural Variables in Negotiations

Communication – the way in which information is transmitted• Direct or Indirect• Verbal or Non Verbal• Tolerance for Silence

Power – The extent to which power is distributed• Egalitarian or Hierarchical

Time – the view of and way in which time is utilized• Patience or Impatience• Relationship focus or Results focus

Collectivity – The extent to which the role of the individual or group takes precedence• Group or Individual

Structure – The extent to which uncertainty or unknown situations create discomfort• Predictability or Uncertainty

Typical Flow of a NegotiationDefine what is required/objectives of the negotiation

Pricing, Capacity, Delivery, IP, etc? Engage with appropriate customers and key stakeholders to ensure

alignment and prioritiesInternal and External Assessment

Understand the competitive Landscape and possible challenges/Barriers to achieving your objectives

This should include the Supplier’s “Known” position.Use above to develop your strategy

Priorities, walk away positions, methods of negotiating, “gives and takes” as well as timeline and possible points of escalations

Ensure you have appropriate ratification of strategy Use a “negotiation Plan” as the method to receive approval for

strategies Who participates in the negotiation, what are their roles? Who is the

lead?Conduct Negotiations & Document the Final agreementClose with Key stakeholders on the final results

Gain re-approval if unable to close on all items or hit appropriate targets

Data Collection and Environmental LandscapeWhat is needed?

Scope of Work Specifications Pricing Targets Timelines

What does the supply base look like? How many viable suppliers are there? What is the competitive landscape? What do they want out of this deal?

Who should be involved in this negotiation? Active/Direct Involvement Consultative/Indirect Advised - FYI Ratification – Pre and Post Neg

Elements of Strategy

Negotiations from a Strong Position

Suppliers “hungry” for the businessStrong data to back up your positionsTechnical and Industry knowledge is highAbility to award or remove opportunitiesNo time pressures exist for BuyerOther incremental opportunities might exist• Additional business• Increased SOW or value add

opportunities

Negotiations from a Weak Position Simulate competition – real or perceived? Develop a BATNA (Best Alternative to a negotiated

Agreement ie: back-up strategy) Determine if escalations are required

• Use these as your “silver bullets” – too frequent they become ineffective

Bank on changing competitive landscape over time• Shift from Seller to Buyer Market

Potential Future incremental opportunities

Understanding the SupplierEnsure you understand their positions

What has been verified, stated and assumedEnsure they understand your positions and requirements

Don’t under estimate the “confusion” factorSet VERY clear expectations at the beginning

Are there any specific needs or restrictionsAsk a lot of questions….. Open ended is best.

What? – UnderstandWhy? - Confront

Restate to ensure understandingAvoid assumptions

Who are the decision makers?

A Negotiation Plan Example

Sections in a Neg Plan

Title, Owner, Suppliers, Contract #Total Contract Value, Length of Contract, Projected

SavingsCurrent Situational AnalysisAreas to be AddressedNegotiation StrategyNames of Approvers/ReviewersGather Information

Negotiation ParticipantsFacts you Know/Facts you need to knowBuyer and Suppliers Needs and RestrictionAreas of Common Ground/Areas of Potential

ConflictBATNA (Best Alternative To Negotiated Agreement) –

Both Buyers and SuppliersNegotiation Completion SchedulePlan Strategy and Tactics

Current Situational AnalysisExplains the current situationWhat history do we have with the

supplier?Background on what is required, from

who and when it will be neededWhat is the competitive landscape and

what potential opportunities or challenges does that represent

This “sets the stage”

Typical Areas to be Addressed in NegotiationsPricing (Present & Future)Effectively DatesCurrencyPayment TermsSpares Availability/DiscountQuality of Product/ServicePre-Ship InspectionInventory ArrangementsRelease and SchedulingCustoms/LicensingTrainingTax ImplicationsIP Ownership & IndemnificationSpecifications

Freight Terms (INCO)3rd party Warehouse Programs/supply ChainSpecific PerformanceEscrow for Custom softwareMfg. Rights/2nd SourceTerms of AgreementTermination & CancellationRetention & AuditsRight of First RefusalField SupportToolingMaintenanceChange Control/Lot TrackingSecurity

Negotiation Strategy

This will explain how they position to meet the end goals

What data will they useWhat logic and positioning will take placeWhat is the primary strategy as well as the

secondary strategySteps that will be taken in case roadblocks are

presentedThis is the “game plan”

Research

This section highlights the “known” facts and positions for both the buyer and seller

It also highlights the areas were additional information is needed.

Outlines the “must have” items for the buyer and the anticipated ones for the supplier

Also works to see were there is clear common ground and tries to anticipate the areas of conflict.

BATNA for both sides is to understand the possible fall back positions for both partiesIf they are weak, then the pressure to close the deal will be

higher with either party

Key Milestones in Neg ScheduleDate the neg plan is reviewed and approvedDate negotiations will start and completePossible “check point” with management on highly

complex neg plansMay include a milestone to trigger escalation if

negotiations are stalled or not going wellContract Signed

Strategy and Tactics (Example)

•Area to Address

•Supplier's Known

Position

•Opening Position

•Exceeds Position

•Accepts Position1

•* Achieved

•Pricing per Unit •$7000/Unit •$4000/Unit •$5000/Unit •$5700/Unit•BM:$5500/Unit•BM Type: Should Cost Model

Negotiation Session(s)

The session (s)Where do you sit?

Leads should sit directly across from each otherTeam size comparison

You have a big team, they have a small teamVisa Versa

Initial DiscussionsFormally share positions, needs and outline gaps to be closed via the

neg. processUtilize negotiation strategies per the plan

Clarification, re-enforce need for items – what are the must havesGives and takes

Use facts, data and logic to support your positionsDon’t make the first compromiseBe ready to respond to surprises and regroupWhen do you walk away?

Tactics and Counter TacticsSituational AmbiguityAnswering Questions with QuestionsFlinchingNo Reaction/SilenceGood Cop/Bad CopCalling the negotiations offTrying to get more after the agreement is reachedCreating Time PressuresTime Outs from a negotiationUnexpected Surprises

Asking for the worldAccepting the first offerManagement is making meLet’s wait on the hard stuffRaising the priceSplit it down the middleHigher AuthorityWant everything and you will give nothingOffer in Writing “perceived CredibilityExhaustion

Tips and Style

Tips for Effective Negotiations – Occam’s RazorMake sure you are dealing with someone of authority who can make the final decisions

Avoid the “I have to get my managers approval”Give on the “little stuff” earlier

Usually the big concessions occur near the end of the negotiationsIt all boils down to “total cost”

Competition is the key driver on costDon’t under estimate the cost of transferred Risk

Keep emotions out of negotiationsDon’t take things personallyAvoid looking anxious to close the dealConfidence is Key – Be prepared

Team Negotiation DynamicsRegroup when positions changeUnderstand the roles of the team (Good cop/Bad Cop, Data Analyst, etc.)

Don’t be afraid to ask for things that sound unreasonableNever know what they may or may not valueCould be a “fake give”

Time – Your friend or your enemy?The group with the most time has the advantage

Tips for Effective NegotiationsSilence is “golden”

Can indicate disagreement – especially with non verbal (facial expressions or actions)

Thought processing – thinking it through…Document key points

Clear note taking is keyShare with other party at end of session

Avoid distractions or interruptionAsk open ended questions and listen for meaning of the

response rather than the wordsCultural Differences in response time, empowerment and direct

communications are always factorsTranslators add a different dimension

Negotiation StrategiesCost Rabbit Strategy Already Vested – Stay with what you knowDelay Strategy – wait it out to see if

competitive landscape changes to your favor

Deferred Risk – Go further upstream to remove cost and risk with sub-tiers

Crystal Ball Strategy – what do you see in the future?

Negotiation StrategiesKeep your Option Open

Second Source or “Stick” StrategyKeep them warm or “Carrot” Strategy

Loyalty Strategy – Are you the customer of choice?

Big Picture Strategy – it is about more than this one deal….

We are in it together – collaborate and share risk/reward

Negotiation StrategiesLock it In Strategy – Make long term

commitment on the current favorable position for long term benefit

Bartering Strategy – exchange for something of value

Unilateral Negotiation Exercise Instructions (Time: 30 Min)

Get together in Groups of 2-3 folksDetermine who will report out for the team

Read the case hand outDetermine the existing situationDetermine which strategies you might use to close

this deal? As well as the pro’s and con’sRefer to Neg strategies – Hand out

See questions at end of case.Document your proposed strategy and your

rational Be ready to discuss with the class

Two Way Negotiation Exercise

Negotiation Teams are your established groups Three Teams will be Buyers Three Teams will be Sellers

After receiving your hand out, each team will break away and strategize on approach (15 Min)

Return to class room to be matched up with opposing team

Break away to conduct your negotiations (15 Min) Return to classroom for Debrief/Report Out (10 Min)

Final ThoughtsBe prepared – plan aheadDon’t be afraid to walk away from a

negotiationYou can negotiate anything…Don’t get in a time pressure situationALWAYS maintain integrity and ethics It is never over….

Starbucks Corporation

Building a Sustainable Supply Chain

Class Discussion

Sustainability Current Events

Final Exam – Hand Out

Q & A

Next Class

Final Presentations & Peer ReviewsNo Current Events

Questions?