Why Negotiation is Important to an Organization?

Negotiation meaning is “an exploratory and communication process (identifying interests, walk-away alternatives, and options) internally and externally to reach a mutually satisfactory agreement (ISM Glossary 6th edition). Integrative negotiation is a core competency that every supply management professional needs to be proficient in to add value to the buying organization. Following are the steps in integrative negotiation which by following you can negotiate anything:

  1. Planning
  2. Preparing
  3. Executing

Importance of Preplanning Prior to Negotiation

Preplanning for negotiation strategies starts early in the sourcing cycle and is essential for negotiation success. Supply management professionals should work with internal customers and other internal stakeholders to identify future sourcing situations that are appropriate for integrative negotiation and when the purchase will be needed.

Situations such as the development of a new product, an outsourcing decision, or an upcoming contract expiration will likely require negotiation. Supply management can add value early in these processes by sharing knowledge about supply market trends and supplier capabilities. Further, you can help internal customers understand the negotiation process and how you can work together to create the best value for your organization.

During preplanning, it is important to be proactive in working with the internal customer and other internal stakeholders to understand their needs and wants. This allows you to understand what factors are most important and what trade-offs can be made during the negotiation process.

Negotiation Examples

A major negotiation example is, the ability to increase capacity to meet growth in demand might be more important than the initial purchase price or there might be several different product configurations that would be acceptable. Working closely with internal stakeholders, you will have the information you need to formally prepare for negotiation skills.

It is also important to understand the relationships that your organization has with the supplier or suppliers that you will be negotiating with to increase your negotiation skills. What type or relationship do they have with your organization? Another negotiation example, currently how much spend does the organization have overall with the supplier, how well does the supplier know your organization’s needs, and what is the relationship between your organization and the supplier’s management teams (Martinez 2012)? Also, what is important to the supplier, and what are the future opportunities for the supplier with your organization? Third negotiation example, the supplier may view this contract as an opportunity to build its business with your organization. Knowledge about the supplier and its relationship with your organization can provide useful leverage during negotiation and getting to yes.

During preplanning, also consider the purchase’s category strategy, financial concerns, and the buying organization’s risk tolerance.

Planning, Preparing for, and Conducting Integrative Negotiations

You can negotiate anything. Integrative negotiations take place in all aspects of our lives. We negotiate with our spouse about when we are going to eat dinner, and we negotiate with our children about how late they are allowed to stay out. We negotiate using our negotiation skills with our coworkers about the role we play in a project, and we negotiate with our supervisor about organizational resources. Diplomats negotiate with their counterparts about foreign policies, and buying and selling organizations negotiate contract terms.

For the purposes of supply management, negotiation meaning is as an exploratory and communication process (identifying interests, walkaway alternatives, and options), internally and externally, to reach a mutually satisfactory agreement. Integrative negotiation can be informal as is the case when supply management professionals negotiate with internal stakeholders (for example, the key decision-makers within their organization). They also negotiate with external stakeholders such as suppliers, customers, and governmental entities.

Negotiations strategies with external stakeholders are often formal. “In supply management, negotiation often involves a buyer and a supplier, each with their own viewpoints, interests, and objectives relative to all phases of a procurement transaction including price, service, specifications, technical and quality requirements, and payment terms” (ISM Glossary 6th edition).

Through negotiations strategies, supply management professionals strategically contribute to their organization’s performance. Negotiation skills affect contract terms, supplier performance, risk exposure, and the nature of buyer-supplier relationships. Although negotiation meaning is often conceptualized as a tool for supplier selection, it sets the tone for and is the start of the buyer-supplier relationship. It is in the best interest of both organizations to ensure that negotiations lead to a successful business relationship. Integrative negotiations also are an important part of ongoing contract management. As conditions change throughout the life of a contract, there are situations that will require getting to yes with the supplier. This section explores the process of negotiation from pre-planning, developing a negation plan, doing the detailed preparation, and successfully conducting negotiations.

Pre-Planning Prior to Integrative Negotiation Strategies

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 Strategies

After identifying the potential negotiation situation, understanding internal customer needs and wants, and researching the supplier, you must understand the purchase’s category strategy to develop effective negotiation strategies.

At an aggregate level, category plans articulate supply market trends, current spend levels, forecasts of future needs, desired number and types of suppliers, and types of supplier relationships. The outcomes from the negotiation must be consistent with and support the overall category strategy. Some specific questions that should be asked when preplanning include:

  • How important is this category to the organization? What is the potential profit impact and level of supply risk?
  • What are the current characteristics of the supply market, and how might they change in the future? For example, is the supply market consolidating, resulting in fewer, larger suppliers who have more market power?
  • What is current and forecast future spend for the category? Is it growing or contracting? Although the purchase volume for your purchase may be small, perhaps there are opportunities for the supplier to provide other products or services in the category.
  • How many suppliers should be used in the category? How much of the category spend does the supplier currently have? Is your organization expanding or consolidating the number of suppliers it is using in the category?
  • What type of relationship is needed with the supplier? Is a close partnership needed or is the purchase more of a transaction? This affects the negotiation strategy and tactics that will be used.
  • If this supplier is being used for other products in the category, how have they been performing? If the supplier’s performance has exceeded expectations, there may be less leverage in negotiation.

Financial Concerns While Developing Negotiation Strategies

In some cases, suppliers, especially smaller ones, have difficulty obtaining financing for their operation and face challenges with adequate cash flow. When preplanning for negotiation, research the supply market and the supplier to see if they may be facing financial challenges. Work with internal stakeholders, including your organization’s finance group, to understand your organization’s financial needs and to determine the flexibility that you have negotiating payment terms, cash discounts, and third-party financing.

What is negotiation skills

Negotiation skills are the skills by which you can convince the other with mutual interests. Following are the benefits which you can avail if you have negotiation skills:

  1. Setting Payment terms in Negotiations

Payment terms define the discount rate for early payment of invoices and the amount of time the buying organization may take before paying (ISM Glossary 6th edition). Payment terms are included in contract Ts & Cs, and should be negotiated because they affect the cash flow of both organizations. Buying organizations prefer more time to pay while suppliers prefer to be paid as quickly as possible.

A supplier may be willing to make concessions in other areas in return for earlier payment. Supply management professionals need to understand the buying organization’s cash flow requirements to understand the range of payment terms that are acceptable. However, if the payment period is too long it can negatively affect the supplier’s financial performance and its ability to perform the contract requirements.

  • Availing Cash discounts in Negotiations

It may be possible to negotiate payment terms that include a cash discount for early payment. For example, a 2 percent discount if the supplier’s invoice is paid in 10 days rather than 30 days. It is important to work with the finance department to determine the appropriate trade-offs to make with respect to the amount of the discount and the payment period when planning for negotiation. Market analysis in negotiation is imperative.

  • Getting Third-party financing

Third-party financing offers mutual benefits to buyers and suppliers. These supplier financing programs use third parties to provide the supplier with access to cash when needed at favorable interest rates, while extending the payment period for the buying organization. See Task 1-G-2-3 for more explanation. Use of third-party financing can create a win-win for the supplier and the buying organization during negotiation.

Risk Tolerance in Negotiations

In the preplanning negotiation process, it is important to identify the potential sources of supply chain risk with the purchase. A major concern is the risk of a supply chain disruption, which can be caused by many factors including natural disasters, supplier bankruptcy, labor strikes, border crossing delays, and quality problems.

However, other types of risks must also be assessed such as price volatility; reputational risk from safety, legal, regulatory, ethics, environmental, or human rights problems; loss of intellectual property; and physical and data security.

Potential suppliers should be thoroughly investigated to understand their exposure to each type of risk and their capabilities to mitigate risk and recover if needed. Areas to examine include location, finances, and legal and regulatory compliance.

Because the causes of risk are often upstream in the supply chain, it is important to understand how suppliers are managing risk in their own supply chains. This can also affect product category management.

Decisions made during integrative negotiation, such as the supplier’s operations location, insurance, indemnification, and payment terms, expose the buying organization to disruption and financial risks. Supply management professionals should understand the level of risk that is acceptable to the top management team and other internal stakeholders in the buying organization.

Negotiation strategies, objectives, and positions should reflect the level of risk that is acceptable to the buying organization. Further, during negotiation, it is important that the supplier understands supply risk, has plans to mitigate risk, and develops business continuity plans.

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