Negotiations occur when two parties confer or discuss to reach agreement or change relationships. Negotiations are used as a tool to obtain maximum value. The choice of negotiation strategies and tactics results from the negotiation planning process.
Execution of Negotiation Strategies
Strategy is the planning and direction of the negotiations. The selection of strategy will depend on whether the negotiation philosophies are win-win/ integrative, win-lose/adversarial/competitive or lose-lose/confrontational. The strategy will depend on the relative power of the supply management professional and supplier, and on the personalities of the negotiators.
Three practical strategies are to reveal no position, to reveal the optimistic position, and to reveal the optimistic position and then immediately offer the target position. The strategy of revealing no position is used when you do not want to discuss position. With this strategy, the supply management professional attempts to maneuver the supplier toward his or her position by probing the supplier’s proposal point by point. This strategy may work when the supplier is eager to reach an agreement, when the supply professional lacks information, or when the supplier’s proposal is long and complicated.
Revealing the optimistic position is the most common approach when you have the supplier’s proposal. The supplier’s proposal is its opening offer, which is also its optimistic position. This approach establishes the range for negotiation on each issue. The supply management professional and the supplier can then discuss and resolve each issue. Revealing the optimistic position and then immediately offering the target position can work if you can sell the supplier on the merits of the offer. This strategy can backfire if the supplier refuses the offer and you may then have to settle for something closer to your pessimistic position.
How to conduct Integrative Negotiations
Integrative negotiation is a communication process in which rapport is built, information is exchanged in a fact-finding session, concessions are made by both parties, and an agreement is reached. Negotiations may occur in person, over the phone, via video conference, or by email.
Building Rapport in Negotiation.
Rapport is a friendly relationship that encourages communication and collaboration. If you like the other party and they like you, the outcomes are more likely to be fair to both parties, which is very important because negotiation is just the beginning of the buyer-supplier relationship. When negotiating face-to-face, social activities such as breakfast, lunch, or dinner that do not involve discussion about the negotiation can help to build rapport. When negotiating in other formats, it is important to take time for “small talk” to find common interests such as sports, travel, or entertainment to help to build rapport prior to concession-making. In many cultures, it is essential to spend time building rapport before starting to make offers and counteroffers.
Holding a Fact-Finding Session in Negotiation.
The next step when conducting negotiations is to hold a fact-finding session with the supplier. Depending upon the complexity of the negotiation, the fact-finding session may be short and occur right before the negotiation or it may be a separate meeting. During the fact-finding session, you should ask questions to clarify your understanding of the supplier’s bid, check your assumptions, and try to identify the supplier’s interests. It is important to ask open-ended questions such as “why,” “how,” and “what” and to carefully listen. The supplier’s team will be also asking questions to check its assumptions and to understand your organization’s positions and interests. Effective questioning can help set the tone for a collaborative “win-win” type of negotiation.
During the fact-finding session, new information may emerge. For example, you may learn that having a longer-term contract that provides demand stability may be more important to the supplier than a higher price. It is important to take a break to assess new information and make changes to negotiation ranges and strategies if needed before proceeding to make concessions.
Strategies for Making Concessions in Negotiation.
The concession-making process involves making offers and counteroffers inside the ZOPA that move both parties closer together. A common misperception is that it is better to let the other party make the initial offer. However, the initial offer sets the anchor point. Once an initial offer is made, the counteroffer and all subsequent offers are made around the initial one. In a typical buyer-supplier negotiation, the supplier has made an initial offer to sell. Thus, it has set the anchor point, which is its optimistic position. Once set, the offers and counteroffers will be moving from the optimistic position toward or below the target position.
There is an “art” to making the offer and counteroffer process. These lead to concessions, which are agreements that one party will give up something to receive something from the other party. How and when positions are revealed during this process is an important aspect of the strategy for conducting negotiations as summarized in Figure 5-5. Practices are framed with respect to when and how the optimistic position and target position may be revealed, and the reasons why. For instance, when the supply management professional is confident about reaching an agreement at the target position, he or she can disclose the optimistic position. Revealing the optimistic position is likely to result in the supplier offering close to the target position. Compared to the optimistic position, the target position looks much more attractive, so the supplier is likely to accept. However, this tactic has to be carried out carefully and has its potential pitfalls as listed in Figure
Figure: Strategies for Making Price Negotiations
| STRATEGY | ASSOCIATED PRACTICES |
| Reveal no position | The supply management professional does not want to discuss position. This strategy attempts to maneuver the supplier toward the buying organization’s position by probing the supplier’s proposal point by point. This strategy may work when the supplier is eager to reach agreement, when the supply management professional lacks information, or when the supplier’s proposal is long and complicated. |
| Reveal optimistic position | The supply management professional has the supplier’s proposal. This approach establishes the range for negotiation on each issue. The supply management professional and the supplier then can discuss and resolve each issue. |
| Reveal optimistic position and then immediately offer target position | The supply management professional emphasizes the merits of being up-front and the value of saving time. This strategy can backfire if the supplier refuses the offer. The supply management professional then may have to settle for something closer to the pessimistic position. |
When making concessions, always make sure to receive something of value for each concession you make. You may want to start negotiation with a concession on something that is less important to you but remember, once you have made a concession, you cannot go back and change it. If needed, take a break and discuss concessions with your team (where the other party cannot hear — for example put the phone on mute or step out of the room) before making an offer or counteroffer. Always write the concessions down because these will be used to form the contract. Don’t rely on your memory. Further, review the concessions while conducting the negotiation to ensure that you are making progress toward your negotiation targets. There are several tactics that are used during the concession-making process.
The Most Important Negotiation Skills You Must Master in Getting to Yes
Tactics are the processes and maneuvers used to put the strategic plan into action. As with negotiation strategies, specific tactics vary depending on the parties’ negotiation type, the relative power position of the negotiators, and the personalities of the negotiators. Effective negotiators can adapt their tactics to the situation and can recognize tactics used by the other party. Basic negotiation tactics are summarized below. While the tactics listed here are relevant to U.S. negotiators, individuals negotiating in other cultures should modify their tactics to fit the cultural situation.
- Sequence or prioritize the issues for discussion, using one of the following approaches:
- Cover the major issues first, assuming that the minor issues will then fall into place.
- Cover the most troublesome issues first, assuming that the other issues will then fall into place.
- Cover the least troublesome issues first to get a feel for the supplier’s position and to evaluate the supplier’s negotiators.
- Arrange the issues so that if one issue is settled, the rest will fall into place.
- Use questions wisely. Questions should draw out information (rather than requiring yes-or-no answers) and should be phrased so that they question the supplier’s position without attacking the supplier’s negotiator personally.
- Listen effectively. Pay attention to what is being said rather than thinking about what your response will be before the other party has finished talking.
- Maintain the initiative. Be prepared to probe for the supplier’s justification in areas that are unclear.
- Use data to support your position. Positions that cannot be justified hurt your credibility.
- Use silence. Silence often makes the other party nervous, and it may result in additional discussion and concessions.
- Avoid emotional reactions, which move the negotiations from issues to personalities.
- Make use of caucuses. Caucuses, or recesses, are an excellent way to rethink your position, interrupt the supplier’s momentum or evaluate a counterproposal. Avoid backtracking when the session resumes.
- Do not be afraid to say no. Do not agree unless you mean to agree.
- Beware of deadlines. Before agreeing to a deadline, make sure you can live with it. It is often better to let a deadline pass than to settle for less than you can live with.
- Be aware of body language. Nonverbal communication is an indicator of what members of the negotiating teams are thinking. Generally, open arms indicate that someone is receptive to the negotiation process. Crossing the arms at chest level often indicates that someone is not receptive to the latest offer, term or condition. Hands, legs and facial expressions may convey the person’s position or opinion. When there is a conflict between what people are saying and their body language, the body language is usually telling the truth. Note that body language may be quite different in countries outside of the United States.
- Keep an open mind. Preconceived ideas block the creativity that is often needed for a positive outcome.
- Get it in writing. Before adjourning, get all agreements in writing and have the appropriate parties sign the agreement(s).
- Make appropriate concessions; doing so can produce significant gains. Concessions need not be made “one-for-one” or be of equal value. Your willingness or unwillingness to make concessions will set the tone for additional negotiations.
- Use the “missing person” tactic, which is the deliberate absence from the negotiations of the person with final authority. This tactic gives the negotiator more time and provides a way out of a tight situation. On the other hand, the supplier may refuse to meet if someone in authority is not present. Many negotiators will refuse to make a firm offer if someone in authority is not present.
- Use the “take it or leave it” tactic. This lets the supplier know that you are firm on an issue and will not move. Do not use this tactic unless you mean it. Think carefully before using this tactic as a bluff. If you must back down, your credibility will suffer.
- Use the “bogey” tactic. In this tactic, the supply management professional tells the supplier that their organization likes the product but states a price that is all they will pay. This tactic often brings a favorable response from the supplier.
- Never negotiate beyond your physical and mental endurance. The pressure of extended negotiations is physically and mentally demanding. This is especially true when the negotiator is experiencing jetlag, is negotiating in unfamiliar surroundings, is negotiating with suppliers from dissimilar industrial or national cultures, or is trying to absorb large amounts of information. Fatigue slows thinking and clouds judgment. Scheduling shorter negotiating sessions, scheduling adequate time for rest and exercise, and reducing the intensity of social activities can enhance negotiations. These are elements that supply management professionals should consider when planning negotiations.
16 Negotiation Tactics for Successful Negotiation
Negotiation tactics are the processes and maneuvers used when conducting negotiations. As you prepare for the negotiation, keep in mind that these tactics can also be deployed by the supplier’s team. Specific tactics vary depending on the parties’ negotiation philosophies, the relative power position of the negotiators, and the personalities of the negotiators. Effective negotiators can adapt their tactics to the situation and can recognize tactics used by the other party. Common negotiation tactics are summarized in Figure. While the tactics listed here are relevant to U.S. negotiators, individuals negotiating in other cultures should modify their tactics to fit the cultural situation.
Figure: Common Negotiation Tactics
| Sequence or prioritize the issues for discussion, using one of these approaches:Cover the major issues first, assuming the minor issues then will fall into place;Cover the most troublesome issues first, assuming the other issues then will fall into place; orCover the least troublesome issues first, to get a feel for the supplier’s position and to evaluate its negotiators; then, arrange the issues so that if one issue is settled, the rest will fall into place. |
| Use questions wisely. Questions should draw out information rather than require yes or no answers, and should be open-ended and phrased so they question the supplier’s position without personally attacking the supplier. |
| Listen effectively. Rather than thinking of what your response will be, pay attention to what is being said. Ask clarifying questions. |
| Maintain initiative. Be prepared to probe for justification in areas that are unclear. |
| Use solid data. Be able to back up the position taken. Positions that cannot be justified hurt credibility. |
| Use silence. Silence often makes the other party nervous and may result in additional discussion and concessions. |
| Avoid emotional reactions. Emotional reactions move the negotiations from issues to personalities. |
| Make use of caucuses. A caucus, or recess, is an excellent way to rethink positions, interrupt the supplier’s momentum, or evaluate a counterproposal. Avoid backtracking when the session resumes. |
| Do not be afraid to say no. Do not agree unless you mean to agree. |
| Beware of deadlines. Before agreeing to a deadline, make sure you have adequate time to achieve your goals. It often is better to let a deadline pass than to settle for a suboptimal agreement. |
| Be aware of body language. When there is a conflict between what people are saying and their body language, the body language usually is telling the truth. The meaning of body language differs depending on country culture. |
| Keep an open mind. Preconceived ideas block creativity that often is needed for a positive outcome. |
| Get it in writing. Before adjourning, get all agreements in writing and make sure the agreements are signed by the appropriate parties. |
| Make appropriate concessions. This can produce significant gains. Concessions need not be made “one for one” or be of equal value. Your willingness, or unwillingness, to make concessions sets the tone for additional negotiations. |
| Use the “missing person” tactic. The missing person is the person with the final authority who is deliberately absent from the negotiations. This tactic gives the negotiator more time and provides a way out of a difficult situation. However, some negotiators will not meet if someone in authority is not present. In addition, many negotiators will not make a firm offer if someone in authority is not present. |
| Use a target tactic. In this tactic, the supply management professional tells the supplier that he or she likes the product or service but “US$X” is all that he or she will pay. This tactic often brings a favorable response from the supplier. |
| Never negotiate beyond your physical and mental endurance. The pressure of extended negotiations is physically and mentally demanding. This is especially true when the negotiator is experiencing jetlag, negotiating in unfamiliar surroundings, negotiating with suppliers from dissimilar industrial or country cultures, or is having to absorb large amounts of information. Fatigue slows thinking and clouds judgment. Scheduling shorter negotiation sessions, with adequate time for rest and exercise, and reducing the intensity of social activities should be important parts of any negotiation planning process. |
Some negotiation tactics called “hardball” should not be used because they can negatively affect relationships. Figure illustrates a few hardball tactics a negotiator must be aware of and be able to recognize when the other party uses them.
Figure: Common Hardball Tactics
| TACTIC | DESCRIPTION |
| Best and final offer | This is a “take-it-or-leave-it” approach that counts on the other party to submit to the offered position and make concessions. It is, in essence, a method to achieve an objective quickly. However, there is a risk that the other party will walk away from negotiations. |
| False offer | The negotiating party makes an extremely attractive offer that is impossible to implement. This type of false offer is made to entice the other party and to get its attention. |
| Good guy, bad guy | One person within the same negotiating team plays a “bad guy” and another person a “good guy.” The other party, when harassed by the bad guy, may open up to the good guy, when, in fact, they are both on the same team. |
| Information planting | A piece of information is left for the other party to see in a seemingly accidental way. The other party that views this information cannot determine whether it is true, but this information may end up affecting its way of thinking. |
| Red herring | During English fox hunting, a red herring was used to distract the dogs from the fox’s tracks. Here, a small issue is blown into a major issue that eventually is conceded, which keeps the other party from addressing the real major issue. |
Negotiation Documentation
Because the outcome of negotiation forms the basis for a contract, it is important to document the process. Documentation also provides the history needed for future negotiations. Figure enumerates what type of information should be documented and how it should be organized.
Figure: Areas of Information Documentation
| KEY AREA | DESCRIPTION |
| Subject | An overview of the negotiations, including the supplier’s name and location, contract number, and description of the item to be purchased. |
| Introductory summary | A description of the type of contract and negotiation action involved, plus comparative figures of the supplier’s proposal, the supply management professional’s objectives, and the negotiated results. |
| Particulars | A description of the product or service to be purchased and who was involved in the procurement. |
| Procurement situation | A discussion of the factors in the procurement situation that affected the final decisions. |
| Negotiation outcomes | A description of the supplier’s contract pricing proposal, the supply management professional’s negotiation objective, and the negotiation results tabulated in parallel form. |
The many approaches to negotiations can be categorized according to the nature of the market, the relative position of the buying organization and supplier, and the nature of the outcome each expects from the relationship. The basic approaches can be described as: (1) win-win/integrative, (2) win-lose/adversarial/competitive, and (3) lose-lose/confrontational. The dual-concern model considers the approach to be a function of the negotiator’s degree of concern for its own outcomes and for the other party’s outcomes.
The choice of negotiation type is affected by at least four other considerations:
- The history of past relationships (positive or negative).
- The belief that an issue can be resolved only if someone wins and someone loses.
- The “mixed motive” nature of most negotiations, where negotiators want their own way, but also want a continuing relationship.
- A situation in which the negotiators are accountable to someone else for their performance.
- Win-win/integrative — The co-operational/integrative negotiation type is likely to be used when both parties have a high degree of concern for their own and the other’s outcomes. Examples of this approach include most negotiations between partners and negotiations where the supply management professional and supplier want to do business with each other.
- Win-lose/adversarial/competitive — The adversarial negotiation type is likely to be used when the negotiator has a high degree of concern for his or her own outcome and a low degree of concern for the other party’s outcome. This is likely to occur if the supply management professional is in a very strong bargaining position relative to the supplier. Conversely, if the negotiator has a low degree of concern for its own outcome but a high degree of concern for the other’s outcome, then the approach is likely to be accommodating or yielding. This is likely to occur if the supply management professional is in a very weak bargaining position relative to the supplier. When both parties have moderate concern for their own and the other’s outcomes, the negotiation type is likely to be compromising, where both parties split any differences.
- Lose-lose/confrontational — The confrontational negotiation type is likely to be used when both negotiators have a low degree of concern for their own and the other’s outcomes. Lose-lose negotiations are likely to occur when both parties prefer not to do business with each other, but are forced to do so because of circumstances beyond their control.
Pre-Planning Prior to Negotiation Process
Pre-planning for negotiation is a proactive approach that involves gathering information, collaborating with internal stakeholders, and standardizing the negotiation process. Pre-planning typically begins when category plans are developed. During this process, supply management professionals clarify the organization’s objectives. Negotiation requires making trade-offs among different factors so you must understand the organization’s overall financial objectives as well as its level of risk tolerance in order to make good decisions. For example, negotiating the lowest possible purchase price may increase risk for the buying organization because the resulting supplier choices and actions (such as reducing quality or service or focusing exclusively on price in their own supplier negotiations) may increase supply chain risk.
During pre-planning, supply management professionals work with internal stakeholders to understand their current needs and future plans. It is essential to have a forward-looking view, to know when and what negotiations will be needed during the coming year. When developing or updating category plans, supply management professionals and internal stakeholders should identify which contracts are expiring and when or if sourcing is needed as part of new product or service development. Identifying when negotiation is needed well in advance ensures that there is adequate time for planning and preparation. Planning and preparation are critical factors influencing negotiation success. If not well prepared, you may not understand your organization’s positions, the supplier’s objectives and likely responses, and what concessions are reasonable.
To be effective, the supply management organization should establish and follow a consistent negotiation process each time negotiations are conducted. A standardized process increases efficiency, but more importantly, ensures that no important aspects of the planning and preparation process are missed. Further, supply management professionals should receive training and develop the skills needed to be effective negotiators well in advance of any specific negotiation. It is also important to understand negotiation philosophies.
Negotiation Types
Often war or sports analogies in which one party loses and the other wins are used to describe negotiations. However, there are three negotiation types shown in Figure, and the use of each depends on the nature of the market, the relative position of both the buying organization and the supplier, and the nature of the outcome each expects from the relationship. The choice of negotiation types also is affected by the following items:
- The history of past relationships (positive or negative).
- The belief that an issue can be resolved only if someone wins and someone loses.
- The “mixed motive” nature of most negotiations (where negotiators want their own way) but also want a continuing relationship.
- A situation in which negotiators are accountable to someone else for their performance.
Figure: Negotiation Types
| WIN-WIN | WIN-LOSE | LOSE-LOSE |
| Collaborative | Adversarial | Confrontational |
| Integrative | Distributive | Disinterested |
| Extensive interaction | Moderate interaction | Limited interaction |
| Long term | Medium/short term | Temporary/transient |
Win-Win/Integrative.
The win-win negotiation type is likely to be used when both parties have a high degree of concern for each other’s outcomes. Examples of this include most negotiations between long-term partners and negotiations in which both the buying organization and the supplier are interested in doing business with the other organization. In the case of procurement negotiations, it is important to strive toward a mutually beneficial agreement (win-win). A win-win agreement is fair but not necessarily equal for all parties. A mutually satisfactory agreement between the buyer and the supplier is the best outcome, where both parties are comfortable with each other and look forward to doing business in the future. If either party feels like it was taken advantage of, cooperation and future negotiations will be approached with caution.
All parties must be able to operate profitably under the terms of the agreement. When partnerships are needed, the supply management professional and the supplier should schedule regular, frequent communication to establish and maintain a positive relationship. Each party should strive to appreciate the other’s perspective. Problem-solving should focus on mutual satisfaction and benefits.
Win-Lose/Adversarial.
The win-lose negotiation type is likely to be used when one negotiator has a high degree of concern for his or her outcome and a low degree of concern for the other’s outcome. This is likely to occur if the supply management professional is in a very strong bargaining position relative to that of the supplier, and the performance outcome is going to be judged by someone else. Conversely, if a negotiating party has a low degree of concern for its own outcome but a high degree of concern for the other’s outcome, the approach is likely to be accommodating or yielding. This is likely to occur if the supply management professional is in a weak bargaining position relative to that of the supplier. When both parties have a moderate concern for each other’s outcomes, the negotiation type is likely to be compromising; both parties may split any differences. However, splitting the difference may not be the best outcome for your organization. It is essential to understand your position relative to your goals before agreeing to split the difference.
Lose-Lose/Confrontational.
The lose-lose negotiation type is likely to be used when both negotiators have a low degree of concern for each other’s outcomes. Lose-lose/confrontational negotiations are likely to occur when both parties prefer not to do business with each other but are forced into the negotiation because of circumstances beyond their control. This situation occurs when the supplier is the only organization that is capable of meeting the buying organization’s requirements. An agreement that ends in an adversarial atmosphere should be avoided at all costs, especially with a key supplier, because a contract is the beginning of an ongoing business relationship. Even in a situation where an impasse is reached and no deal is made, both parties must understand that walking away is the mutually beneficial outcome given the circumstances. In this situation, both parties agree to no agreement.
Special Considerations in Conducting Negotiations
- Fact-finding sessions
Fact-finding sessions are periods when the negotiator or negotiating team make every effort to develop data and information about the other party. The team should conduct a complete study of the supplier’s business history, length of time in business, growth and overall success. If previous negotiations have been held with this supplier, the effectiveness of previous strategies and tactics should be critiqued. Based on previous negotiations and meetings, the team should develop profiles of the supplier’s negotiators to assess individual personalities, evaluate strategies and tactics they are likely to use, identify strategies and tactics that are likely to work with them, and provide guidance for others in the organization who may negotiate with them in the future. Financial data can be gathered from many Internet sources such as Dun & Bradstreet reports (www.dnb.com), news websites, government filings and stock market analysis reports. Valuable information can also be gained by talking to people and organizations that have dealt with or are familiar with the supplier. Facts and “lessons learned” should be documented soon after negotiations are concluded. Lessons learned provide insights into what worked, what did not work, what was learned about negotiations, what was learned about preparing for negotiations, and how to prepare next time.
- Final proposal revisions
In U.S. government negotiations, the Federal Acquisition Regulations require that there is an opportunity for suppliers to submit final proposal revisions after the conclusion of negotiations. There must be an established cut-off date for receipt of that proposal revision.
- Negotiating with sole offeror vs. entire competitive range
When a supplier does not have competition or has very limited competition, the buying organization finds itself in a difficult position from which to negotiate. Several tactics can assist the supply management professional negotiating in these circumstances:
- The supply professional can advise the supplier that the buying organization is considering making or performing the item in-house.
- The supply professional can advise the supplier that if the price is not reasonable, the buying organization will no longer consider making the product that requires the component.
- The supply management professional can advise the supplier the organization is considering substitute items.
- If the supplier is already supplying products to the buying organization, the supply professional can advise the supplier that its long-range interest should be in keeping the buying organization as a customer rather than achieving a temporary price advantage.
- The supply management professional can seek a win-win/integrative situation where costs, risks and savings are shared.
- If the supplier has high inventory levels and needs to reduce them, the supply management professional can use this as leverage.
- If the supplier has financial problems and needs the additional business, the supply chain management professional can use this to his or her advantage.
- Documentation of negotiations
Accurate documentation of negotiations is essential. Documentation should include the following:
- Subject: An overview of the negotiations, including supplier’s name and location, contract number, and a description of the item to be purchased.
- Introductory summary: A description of the type of contract and the type of negotiation action involved, plus comparative figures for the supplier’s proposal, the buying organization’s objectives and the negotiated results.
- Particulars: A description of the product/service to be purchased and the individuals involved in the sourcing process.
- Sourcing situation: A discussion of the factors in the sourcing situation that affected the final decisions.
- Negotiation summary: A description of the supplier’s contract pricing proposal, the supply management professional’s negotiation objective and the negotiation results, tabulated in parallel form. Dates of meetings and the names and titles of the participants from the buying organization as well as the supplier’s organization should be included.
- Negotiations as a consortium or cooperative
The purposes of consortiums and cooperatives (co-ops) are similar; however, they differ in structure. The ISM Glossary (6th edition) states a consortium is when several organizations combine their purchasing power for selected items to gain leverage in the marketplace and reduce costs. They may form or use a centralized buying service, or cooperate informally. A consortium is a formal organization, usually comprising private-sector, for-profit, noncompeting organizations from varied industries. Members are usually active in the management of the consortium, whether commodity purchases are made by lead members or by a hired third party. Consortiums are actively managed by commodity teams. These teams are usually made up of supply management professionals from member organizations. The consortium is usually “cash neutral,” meaning that members are expected to pay for products procured on their behalf under the terms of the supplier invoice.
A co-op is a for-profit or not-for-profit business that serves members in a single industry, such as hospitals, universities or county governments. Co-op members play no role in the management of the co-op’s suppliers and administrative activities. Members may recommend suppliers, but co-op management evaluates and selects suppliers. Members may order directly from a supplier, or the co-op may serve as the member’s purchaser.
Both consortiums and co-ops combine the procurement power of their members in the marketplace to achieve lower prices, better quality, reduced administrative costs, standardization, better records, and greater competition. Criticisms of these collaborative procurement arrangements include inferior products, longer lead times, limited item availability, increased paperwork and the effect of placing smaller suppliers at a competitive disadvantage.
Antitrust problems due to restraint of trade usually do not arise for consortiums in the U.S. if their activities represent “legitimate joint purchasing” that falls within the federal “antitrust safety zone.” If the percentage of purchases by the consortium or co-op falls below a certain percentage (usually in the range of 25 percent to 35 percent) of total sales in the relevant market, and if the jointly procured products and services represent less than a certain percentage (usually in the range of 10 percent to 25 percent) of member revenues, then the co-op or consortium probably will not be challenged for antitrust violations. The Antitrust Division of the U.S. federal government has a business review process for evaluating whether a consortium is within the “safety zone.”
When collaborative procurement agreements are being negotiated, issues may relate to forming or joining a consortium or co-op. Some of these issues include the following:
- Protection from antitrust problems.
- Limitation of liability concerns.
- Ease of entry and exit.
- Definition of rights and obligations of members.
- Protection of confidential information.
- Costs and membership fees.
- Requirements to buy from participating suppliers.
- Special needs such as storage, delivery or quality requirements.
- Rules of behavior.
- Technology considerations (for example, e-auctions)
Determine if and how e-souring tools will be used in the negotiation process. Technology-enabled negotiations in procurement are often in the form of the electronic reverse auction. This form of negotiation has the potential to reduce cycle time and increase information transparency, price visibility, competitiveness and efficiency. Despite these advantages, e-auctions also have the potential to deteriorate trust and commitment, create resistance from both internal and external users, and create a more involved preparation process.
- Internal and external stakeholder management plan
As described in previous published paper, internal and external stakeholders have a vested interest in the negotiation outcome or will be affected by and/or can influence a decision-making process. Supply management professionals should identify key stakeholders and determine their roles in the sourcing process. For example, plans for effective communication with and management of both internal and external stakeholders should be prepared to ensure they are informed of the process or outcome, if appropriate.
How to Handle Special Situations Using Negotiation Skills
Negotiating with a sole supplier and negotiating as a consortium or cooperative are unique negotiating situations. In addition, advances in technology have and will continue to change the negotiation process.
Negotiating with a Sole Supplier. Negotiating with a supplier that has no or very limited competition is difficult. In this situation you should look for ways to improve your BATNA. For instance, the buying organization may consider producing the item in-house. If the price is not reasonable or other requirements cannot be achieved, the buying organization may consider no longer making the product that requires the component or service; alternatively, if it is still considering making the product or providing the service, the buying organization might look for substitute items or processes. One or more of these potential alternatives may be communicated to the supplier. For instance, a consumer packaged goods company was developing a new product that required a material that was only produced by one supplier in the world. To improve its BATNA, the company started a research and development (R&D) project to develop a process to make the material in-house, and made sure that the supplier was aware of this project. The supplier was willing to make concessions and a contract that was acceptable to the buyer was negotiated.
If the supplier is already supplying products or services to the supply management organization, advise the supplier that its long-range interest should be in keeping the buying organization as a customer, rather than achieving a temporary price advantage and seek a win-win situation where costs, risks and savings are shared. If the supplier has high inventory levels and needs to lower them, you can use this as leverage. If the supplier has financial problems and needs the additional business, this is an opportunity as long as the risks are acceptable or can be effectively mitigated.
Negotiations as a Consortium or Cooperative. A cooperative, or co-op, can be a for-profit or not-for-profit business. It serves its members in a single industry, such as groceries, hospitals, or local governments. A consortium is a formal organization, usually comprised of private-sector, for-profit organizations. These organizations typically are noncompeting organizations from varied industries that are engaged in purchasing similar goods or services. Co-op members play no role in the management of the co-op’s suppliers and other administrative activities. Members may recommend suppliers, but co-op management evaluates and selects suppliers. Members may order directly from the supplier, or the co-op may serve as a member’s purchaser. Contrarily, members of a consortium usually are active in its management. Consortia are actively managed by commodity teams, and commodity purchases are made by lead members or by a hired third party. These commodity teams generally are comprised of supply management professionals from member organizations. The consortium usually expects its members to pay for products or services purchased on their behalf within the terms of the supplier contract.
Even with differences in structure and operations, the purposes of consortia and co-ops are similar. Both consortia and co-ops combine the purchasing power of their members in the marketplace to achieve lower prices, better quality, reduced administrative costs, standardization, better records, and greater competition. Typical criticisms that have been made against these collaborative purchasing arrangements include inferior products, longer lead times, limited item availability, increased administrative costs, and placing smaller suppliers at competitive disadvantages.
Antitrust violations in the United States because of restraints on trade usually are not problems for consortia if their activities represent legitimate joint purchasing within the federal antitrust safety zone.5 If the percentage of purchases by the consortium or co-op falls below a certain percentage (for example, in the range of 25 percent to 35 percent) of total sales in the relevant market, and if the jointly purchased products and services are less than a certain percentage (for example, in the range of 10 percent to 25 percent of member revenues), then the co-op or consortium probably will not be challenged for antitrust violations. The antitrust division of the federal government has a business review process for evaluating whether a consortium is within this zone.6
When negotiating collaborative procurement agreements there are a number of issues that should be addressed, including:
- Costs and membership fees.
- Rules of behavior.
- Requirements to buy from participating suppliers.
- Protection from antitrust problems.
- Limitation of liability concerns.
- Ease of entry and exit.
- Definition of rights and obligations of members.
- Protection of confidential information.
- Special needs such as storage, delivery, or quality requirements.
Technology Considerations. Technology is changing the negotiation process. For instance, eRFxs and e-bids are now commonly used in negotiations. Videoconferencing, conference calls, and email can be used for communication rather than face-to-face meetings to reduce the cost of travel. However, studies suggest behavior and outcomes are more favorable for face-to-face negotiations compared to virtual negotiations.
Supply management professionals must also determine if an electronic auction (e-auction) or traditional face-to-face negotiation will best achieve the negotiation’s objectives. As discussed in Section 4, an e-auction is typically used when price is the most important factor, and there are numerous qualified and willing suppliers whose products or services meet the specifications. An e-auction is “a process in which a purchaser prequalifies multiple suppliers and invites them to participate in a fixed–duration, web-based bidding or sourcing event” (ISM Glossary 6th edition). Successful e-auctions require careful planning and preparation to ensure that specifications are clear and that participating suppliers are qualified. Designing the auction is very important to the outcome. Key decisions in e-auction design include determining how to combine products and services into the bundles or lots that suppliers find attractive, determining how much and what type of information should be visible to suppliers, and deciding on the amount of time that should be allotted for the auction.
Advances in e-auction software allow for multi-attribute e-auctions that weigh multiple factors such as price, quality and delivery in sourcing decisions. E-auctions can also be used as part of a two-part negotiation process. Price is determined during the e-auction, and other terms of the contract are agreed upon during a post-auction negotiation with the supplier. However, to be fair, all suppliers must be informed in advance if post-negotiation will be used.