LECTURE 18

Gathering Information and Analysis,

Preparing for the Negotiation
Conducting Negotiations

Prepared By
Mueen Yousuf
GATHERING INFORMATION AND ANALYSIS

Analyzing the
Supplier
Situation

Analyzing
Your
Organization
 GATHERING INFORMATION AND
ANALYSIS
 Having the right information available when needed is always
critical to a successful approach to strategy formulation.
 It is important to know at least as much about the conditions
that may influence the negotiation of the supplier.
 By being informed, your team will be able to develop realistic
and workable strategies.
 Having the right facts can also preclude the supplier from
springing negotiation surprises as tactics.
 Each team member should be responsible for gathering a
portion of the information that is needed to adequately prepare
for both developing strategies and actually participating in the
tactical negotiations. Price analysis and market conditions.
 GATHERING INFORMATION AND
ANALYSIS
 Having the right information available when needed is always
critical to a successful approach to strategy formulation.
 It is important to know at least as much about the conditions
that may influence the negotiation of the supplier.
 By being informed, your team will be able to develop realistic
and workable strategies.
 Having the right facts can also preclude the supplier from
springing negotiation surprises as tactics.
 Each team member should be responsible for gathering a
portion of the information that is needed to adequately prepare
for both developing strategies and actually participating in the
tactical negotiations. Price analysis and market conditions.
GATHERING INFORMATION AND ANALYSIS
ANALYZING THE SUPPLIER SITUATION

• FINANCIAL NEEDS

• EXISTING RELATIONS
ANALYZING THE SUPPLIER SITUATION
 (i) Financial Needs.
From publicly accessible reports such as those filed with the SEC and from
the reports of market analysts tracking its stock performance, it will be
possible to gain some relative understanding of the supplier’s financial picture
and insight into its level of motivation to obtain your business.
Obviously, the greater the financial need, the greater is the supplier’s
incentive to offer concessions.
Often need to obtain information available through an industry
organization or professional association or through other sources familiar with
the supplier’s operations.
The supplier’s competitors will often have comparative data to share but
fact is that suppliers are not in the habit of passing good news about their
competition.
ANALYZING THE SUPPLIER SITUATION
(ii) Existing Relations. Some of the questions in this regard include:
• How much does a supplier value the status of its existing relationship with
your organization?
. Are you a reference account?
• How does your business impact the supplier’s bottom line?
• How does your volume affect its position in the marketplace?
• Does your organization require more or less customer service than others?
• Are your business needs relatively easy to forecast?
• Are your volumes consistent over time?
• Do you pay your invoices in an acceptable time frame?
• Are your organizations engaged in joint product development?
 ANALYZING YOUR ORGANIZATION’S POSITION
ANALYZING YOUR ORGANIZATION’S POSITION

URGENCY

PRIORITY OF NEEDS

INTERNAL CONSTRAINTS
 ANALYZING YOUR ORGANIZATION’S POSITION

(i) Urgency.
 When does your organization need the product or service you will
be negotiating?
 If it is needed urgently, you may want to prepare to negotiate
accelerated delivery by trading concessions in other areas such as
price or transportation methods.
 On the other hand, if the requirement can be met over a period of
time, allowing the supplier to fulfill it when time and resources
are not being otherwise used, this might prove a useful concession
to achieve better prices.
 ANALYZING YOUR ORGANIZATION’S POSITION

(ii) Priority of Needs.

 When you initially evaluated a key supplier, you may have
measured its performance on a weighted-average matrix to help in
the selection process.
 hierarchy of importance by assigning values to each of the
categories: cost, quality, technology, and service. In establishing
the priority of needs for a particular negotiation, you will want to
review your selection matrix to help determine the approximate
priority of the organization’s needs.
 Table 7.2 shows an evaluation matrix

 In terms of concessions, then, we would likely trade elements of

service (the lowest value on the list) for pricing concessions (the
highest value on the list)..
ANALYZING YOUR ORGANIZATION’S POSITION
 ANALYZING YOUR ORGANIZATION’S POSITION

(iii) Internal Constraints.

 Unknown conditions For example, it may be impossible to
precisely define a scope of work for a construction project
renovating an existing building. Contractors rarely know what
they will find when opening a wall or ceiling. As a result, you will
likely be unable to develop a firm fixed price for the project.
 Other contracts may be similar where quality, delivery, and
liability are dependent on a set of conditions that are not known at
the time of negotiation.
 In addition to unknowns, there may be internal management
pressures to achieve certain goals beyond the value that they may
be conceivably add.
 ANALYZING YOUR ORGANIZATION’S POSITION

(iii) Internal Constraints.

 Using a proprietary architectural design to beautify the lobby of the
headquarters building may hamper your ability to negotiate with the
contractors; nevertheless, it would be unrealistic for a buyer to consider
altering an architect’s design.
 You may also want to consider situations where trade-offs will require an
additional investment by your organization. For example, if shortened lead
times are critically necessary and the supplier has no flexibility in its
manufacturing processes, you may need to develop longer-range forecasts.
 This may require the addition of a staff planner or a more sophisticated
software system. With this knowledge, you will be able to properly
evaluate the costs of items that will not be effectively negotiated
PREPARING FOR THE NEGOTIATION
 PREPARINGFOR
PREPARING FOR THE
THE NEGOTIATION
NEGOTIATION

SELECTING AND
LEADING THE
NEGOTIATION
TEAM

FORMULATING
OBJECTIVES AND
SELECTING
STRATEGIES
 SELECTING AND LEADING NEGOTIATION TEAM

(i) Selection Criteria.

 It is naturally important that key members of the user group—the stakeholders, as
they are sometimes called—actively participate in the negotiation process for a
number of reasons.
 First, there are technical issues that will arise during the course of discussions that
only they will be qualified to answer.
 Second, as the users, they are in the best position to understand the importance of
the various elements of the offer and so can determine whenspecifications can be
relaxed, as well as the value of certain trade-offs.
 Third, as subject matter experts (SMEs), the users are in the best position to
evaluate what service levels should be established and the metrics used to
evaluate performance. And lastly, the users are the successors of the negotiated
bargain—the group that must live with the resulting conditions—and they will
inherit not only the wins, but the losses as well. In addition to members of the
user group, you should ensure that you have representation from the various
business units such as Finance, Operations, or Facilities.
 SELECTING AND LEADING NEGOTIATION TEAM

(i) Selection Criteria.

 These are the support staff who can provide additional skills—based on their
functional roles—to the team when needed. You should select team members
according to their behavioral skills as well.
 Behavioral skills include such qualities as decisiveness, intelligence, business
savvy, problem-solving abilities, drive to achieve, patience, and the ability to
communicate. It will be up to you to determine what behavioral skills will be
needed and who within the broad stakeholder community best demonstrates them
 SELECTING AND LEADING NEGOTIATION TEAM

(ii) Assessing the Team’s Strength and Weaknesses.

 It is a good idea for the members of the team to jointly assess its collective
strengths and weaknesses in advance.
 By doing so, team members will develop a more realistic understanding of the
constraints they are operating under and what technical skills are available to
effectively maneuver to a favorable concession as a result.
 Externally imposed deadlines can often generate situations that create bad
decisions, or the lack of authority to make a decision can lead to a stalemate
 SELECTING AND LEADING NEGOTIATION TEAM
(iii) Communicating with Team Members.
 The team leader is responsible for seeing that participants know what factual
information is needed and who should be gathering it. Information should have a
clear distribution channel so that everyone can be updated on relevant
information as it becomes available.
 Exercise caution, however, to ensure that there is not so much information
generated that it inundates the team and creates data overload. The team leader
also needs to define the individual roles that may be necessary during the course
of the negotiation and to help assess which members are best suited to each
specific task.
 This is likely to include deciding who will become the team’s spokesperson and
how decisions to accept or reject offers will be made. Signals need to be
developed that can indicate to other members when offers are acceptable and
when they are not, similar to the way they might be used in a sporting event when
the coach wants to send a specific play to team members.
 The team also needs to know who will make the final decisions and the authority
level of each of the negotiators
SELECTING AND LEADING NEGOTIATION TEAM
SELECTING AND LEADING NEGOTIATION TEAM
FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
 FORMULATING OBJECTIVES
FORMULATING AND
OBJECTIVESEGIES
DEVELOPING STRATEGIES

Establishing
Objectives
Priorities

Preparing Planning Your

Psychologically Agenda

Conducting
Practise sessions
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
 Put this plan in writing so that you and your team members can use it as a guide
in future negotiations.
 As a first step in developing the plan, team members should list their objectives
and the anticipated objectives of the supplier.
 Objectives can be based on the identified gap between initial expectations in the
sourcing process and those actually achieved. Under each objective, indicate the
likely impact of not achieving the objective.
 Then rank the objectives on this list by priority, focusing on developing a strategy
for those that are most critical. (You might call these “take-aways” and “give-
aways.”)
 Determine a position at which you would be willing to accept the offer and one
where you would be willing to walk away altogether for each of the key
objectives.
 Assessment of the situation, such as current market conditions, will play a
critical role in this process, for without it you will likely not be able to understand
the supplier’s needs and motivation.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
 What objectives are they likely to have? What concessions are they likely to
make? At what point in each of the elements do you feel the supplier will
concede, and at what point are you willing to simply walk away?
 As you answer these questions for your own position and then compare them to
the answers you come up with for the supplier’s anticipated position, you will
gain a preview of how the actual negotiations may develop and how you can best
respond to specific offers or demands.
 Gap analysis can be viewed as the process of assessing (measuring) the difference
between the current condition and the desired outcome.
 Decision tree to determine what play should be logically called next
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
(i) Objectives.
 Develop a set of expectations. These expectations were based on your
organization’s needs.
 Whatever needs are not fully satisfied in the supplier’s response, even when that
response is the best one received, will need to be further negotiated.
 In this section, we’ll discuss the few elements you might want to consider
including in your checklist such as price, quality, service levels, capacity or
volume, the length of the contract, and managing specifications. Shown in Figure
7.3
 is an example of a planning template that outlines your organization’s objectives
and compares it with the likely objectives of the supplier’s organization.
FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
PRICE Despite the fact that importance of value and the concept of total cost of
ownership, the focal point of any negotiation is usually price.
 The seller wishes to reasonably maximize profit, and the buyer wishes to obtain
the best possible price. In most cases, the ideal position for both is a fair and
reasonable price.
 On an exchange, commodity prices fluctuate openly in response to supply and
demand, so the trading price at any given time reflects the current price a buyer is
willing to pay and the current price at which a seller is willing to sell.
 In the absence of a public exchange, however, the buyer can turn to the
competitive bidding process.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
Price
 When the competitive bidding process is used, there may be some further need to
negotiate price. For example, while a specific contract may have an agreed-upon
fixed price, the buyer will also want to fix the rates for changes and perhaps
prenegotiate the conditions under which the contract may be extended for an
additional period of time. This may or may not have been addressed in the initial
proposal or competitive bid
 When evaluating and negotiating price, consider shipping costs and disposal
costs, and the terms of payment
 Conceding a point or two on the price list in exchange for more favorable
payment terms (e.g., Net 30 extended to Net 45) can be calculated as a cash value
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
QUALITY
 Knowing where specifications and tolerances can be relaxed and where they
cannot needs to be determined largely in advance and should be included in the
negotiation plan.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
SERVICE LEVELS
 In many cases, service levels are included in the statement of work in the form of
a service-level agreement (SLA).
 As with quality specifications, service levels, too, can be relaxed and traded off as
a concession to receiving some other benefits in exchange. Required lead time
that can be extended through some improved planning on your end and early
placement of orders may prove beneficial to the supplier and could result in a
greater commitment to on-time delivery.
 Or you may be willing to make some pricing concessions in order to obtain just-
in-time (JIT) delivery or the benefit of establishing a supplier-managed inventory
(SMI) program.
 Service levels can also be evaluated in terms of engineering support provided by
the supplier and the impact of this support on your operations.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
CAPACITY/VOLUME
 Whenever the potential for limitations in a supplier’s production or service levels
exist as a result of forecasted changes in market conditions, you will need to
address it contractually.
 During periods of constrained capacity and shortages when supplier’s cannot
keep up with demand, you will want to ensure that your organization has the
protection it needs by locking in specific commitments from the supplier for
certain amounts of its capacity or specific volumes based on your anticipated
needs.
 This, of course, is always a trade-off, since in exchange for guaranteed capacity,
the supplier usually wants a guaranteed volume of business.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
LENGTH OF CONTRACT
 Another point of negotiation occurs when there may be considerable risk
involved in the fluctuation of prices, and you (or the supplier) wish to lock in
pricing for. a given period of time.
 If your team sees prices rising, you will want a longer term for the contract at the
current pricing; the supplier, seeing the same trend, will want to shorten the
contract period, hoping that increased prices will result in additional revenue.
 The opposite is true, of course, when prices appear to be falling. There are many
other reasons for negotiations to occur around the length of the contract.
 The supplier naturally wants to be assured of your organization’s business—all
other things being equal—for as long as possible. You may want a longer contract
period to avoid the additional cost of switching from one supplier to another.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
MANAGING SPECIFICATIONS
 The technical users on the team are generally responsible for determining the
specifications. Often, you will find that the tighter the specifications are (in terms
of typical industrial capabilities), the more you will have to pay.
 Tighter specifications may also mean additional inspection time (and cost) that
interferes with the smooth operation of the supplier’s production.
 It is always advisable, in situations where specifications are critical, to maintain a
want position, a need position, and a can accept position so that you are flexible
enough to earn concessions for more critical factors.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
(ii) Establishing Priorities.
 As previously described, organizing the priority of your team’s
objectives can be one of the most important aspects in any
negotiation planning process.
 Based on team discussions and consensus, it is possible to
organize each of the stated objectives into a priority list or, at the
least, indicate if they are high, medium, or low.
 During the actual course of negotiations, you will want to be
certain to maintain these priorities to avoid wasting time by
negotiating for relatively unimportant objectives.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES
(ii) Establishing Priorities.
 Establishing priorities also relates to determining the amount of
time devoted to the actual negotiations.
 Setting deadlines and the number of sessions reminds everyone
that there is an objective to be reached. With this in mind, little
time should be devoted to minor issues until the major ones are
resolved.
 However, the order in which you negotiate specific items,
critical or minor, can be varied to meet the team’s overall
strategy.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES

(iii) Preparing Psychologically.

 Psychological preparation generally means preparing well enough
to develop a high level of confidence in the validity of your
position.
 As mentioned earlier in this chapter, confidence develops from
having a firm grasp of the conditions in the marketplace and
understanding the position of both parties relative to their
competitors.
 Gathering facts and analyzing the supplier’s position, as well as
your own, leads to a clear understanding of what concessions are
required and what concessions are going to be impossible to
obtain. Attempting to achieve that which is impossible can only
lead to disappointment and confrontation. Conversely, lowering
expectations below
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES

what is truly possible can lead to demoralization and a sense of loss

following the negotiations. The best practices today have buyer and
supplier teams working collaboratively so that both achieve the
fullest benefit of the bargain.
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES

(iv) Planning Your Agenda.

 As part of your psychological preparation, you will want to have
your agenda set up in advance. This provides your team with a
sense of direction and sets your own pace for the negotiation.
 The timing of the negotiation is always a critical factor in
establishing a strong base for leverage. Timing means not only
when the negotiations start and end, but when individual items
will be open for discussion.
 This gives you the opportunity to achieve key objectives first
before relinquishing key concessions. Negotiations often move
much like card games, where one player can use cards discarded
by the other
 FORMULATING OBJECTIVES AND DEVELOPING
STRATEGIES

(v) Conducting Practice Sessions.

 Finally, it can be quite useful to have your team practice for the
actual negotiations by holding some realistic practice sessions.
 During these sessions, team members can take turns in the
anticipated role of the supplier and gain some insight into the
situations that are likely to occur during actual negotiations.
 You can make the process even more realistic by bringing in
participants from other groups and creating a somewhat
competitive environment by offering relatively substantial prizes.