1. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Practice 16. Negotiating techniques and rules of conduct

2. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Program Characteristics of purchasing negotiations for industrial purchases Recognizing negotiating situations Factors which can weaken the negotiating position Preparing for negotiations Planning negotiations Tactics in purchasing negotiations Stages in purchasing negotiations Rules of conduct and purchasing ethics

3. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Characteristics of purchasing negotiations for industrial purchases. Retail buyers versus industrial buyers:  The purchasing policy of a trading company is closely related to its sales policy, because the purchase price directly influences the sales ability and profitability of the product. This is less so in industrial companies because the purchasing share in the end product is lower  Retail buyers have more freedom in decision making than industrial buyers.  The buyer of industrial goods usually has a longer term, more intense relationship with its suppliers than retail buyers.  Price is often less important for the industrial buyer than good quality, delivery reliability and service

4. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Recognizing negotiating situations Negotiating situations are aimed at: Bringing together the parties through concessions in such a way that both parties can look back on the outcome of the negotiation with some satisfaction Negotiations concern more elements than price alone: Negotiations concern all elements that are important in reaching the agreement. Issues like quality and delivery reliability, as well as after sales service are frequently more important than price and terms of payment

5. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Factors which can weaken the negotiating position Factors which can weaken the negotiating position.. Lack of preparation time. Lack of knowledge with regard to market developments, the market position of the supplier and own company’s relative position. Lack of knowledge of the supplier’s cost structure. Insufficient information on the supplier’s organization. Too little listening and too much talk on the buyer’s side. Insufficient command of foreign languages. No or very few alternative sources available. Few valid arguments to support the buyer’s point of view. A negotiating partner on the buying team speaks out of run. Insufficient authority to close an agreement.

6. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Factors which can weaken the negotiating position Three main points which must be predetermined for every negotiating:  Goals and objectives. Is it clear what the negotiations should accomplish? What is the minimum result that must be achieved and what are the maximum concessions one is willing to make?  Authority. What authority does the negotiator have to make a deal? Does he/ she have the necessary support from higher management levels?  Expertise and knowledge. Do the people who are going to conduct the negotiation have the required expertise and knowledge? Are they experts on the subject? Do they actually know the business?

7. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Preparing for negotiations It’s important to find out at an early stage what the other party’s view of the negotiations will be:  What exactly are they hoping to achieve?  What interests are possibly shared?  What are the expected potential subjects the other party wants on the agenda? It’s important to find out as much as possible about the other party:  New supplier: examination of annual reports and bank references  Existing supplier: analyze relationship over past years and past performance. Furthermore: having gathered the information, think about possible points of agreement

8. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Planning negotiations When the homework is done, planning of the negotiations can begin. There are 10 steps in this process… 1.Establish the objectives of the negotiation for yourself 2.Gather facts that can have a big impact on the negotiations 3.Asses the power position of each of the parties 4.Determine the points of common interest 5.Make a list of questions 6.Define your tasks 7.Decide on the composition and division of roles in your negotiating team 8.Plan your concessions 9.Agree upon the negotiating tactic you will follow 10.Indicate how you think you will conclude the negotiations

9. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Tactics in purchasing negotiations Take-it or-leave-it. One party wants to impose its terms on the other party, without concessions. Bogey. The buyer approaches the supplier in a very friendly way and comments on his proposal positively. However he lets know that, if there is to be any business, the proposal has to be slightly adjusted. Chinese crunch. Here it is declared that an agreement is possible as soon as he solves just one little problem. Auction. the buyer makes the supplier explain why they should do business together. Good guy-bad guy. Purpose of this tactic is to dim the other party’s expectations about the outcome of the negotiations.

10. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Stages in purchasing negotiations Four stages can be identified in the course of the process: 1.Exploration. Both parties try to get acquainted. Next they try to discover mutual interests and intentions. They also try to asses the importance of the negotiations for the other party. 2.Reflection. This stage consists in digesting the information received from the other party. Does this information necessitate a revision of your objectives? 3.Negotiation. Concessions are made on both sides. It is important to check how the other party responds to concessions made by you. 4.Closing. Repeat and summarize the agreements that have been made. Is the other party satisfied with the results?

11. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Rules of conduct and purchasing ethics Questions can raise on the side of the buyer as to how far one should go in a relationship with a supplier. Questions that may occur:  How should confidential supplier price information be handled?  How to deal with quotations: should we only use quotations if we are considering requesting a firm bid from a supplier, or do we also use them to check current supplier’s prices?  What is the maximum share we as customer want to have in the supplier’s turnover?  Do we always strive to have at least two suppliers (dual sourcing) or are single sources allowed in particular circumstances?

12. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Conclusions Negotiating is an important aspect of the buyer’s activities and it takes up a large part of his time Before starting negotiations with a supplier, it is important to determine:  The goals and objectives  What authority the negotiators have to conclude an agreement with the supplier’s representatives (and vice versa)  What information is required to negotiate effectively A sound preparation is half of the job!