Chapter 14Purchase NegotiationSlide 3Negotiation FrameworkSlide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Power in NegotiationSlide 18Slide 19Slide 20ConcessionsSlide 22Slide 23Slide 24Negotiating TacticsSlide 26Win-Win NegotiationSlide 28Negotiation Conclusions1Chapter 14NegotiationIDIS 424Spring 20042Purchase NegotiationNegotiation Overview--Negotiation is a process of formal communication, either face to face or via electronic means, where two or more people come together to seek mutual agreement about an issue or issuesThe process involves the management of time, information, and powerIt is a time-consuming process that requires extensive planning and a commitment of resources--90% of the negotiation process involves preparation, not execution3Purchase NegotiationNegotiation Overview--Negotiation involves relationships between people, not just organizationsThe primary objective of a purchase negotiation is to reach an agreement that satisfies both partiesNegotiation is an opportunity to create value within the supply chainGood negotiators are not born--they develop their skills through practice4Negotiation FrameworkPurchase negotiation involves a five-step processIdentify or Anticipatea PurchaseRequirement Identify or Anticipatea PurchaseRequirement Determine ifNegotiation is Required Determine ifNegotiation is Required Plan for theNegotiationPlan for theNegotiationConduct the NegotiationConduct the NegotiationExecute theAgreementExecute theAgreement5Negotiation FrameworkIdentify or Anticipate a Purchase RequirementThe purchasing cycle begins with identifying a material need or requirement for a component, raw material, subassembly, service, supplies, piece of equipment, or completely finished productDiscussion Question: How does purchasing gain visibility to the material requirement needs of its internal customers?6Negotiation FrameworkDetermine if Negotiation is RequiredNot all purchase requirements require detailed negotiations with suppliers. Remember--negotiation is a time consuming process! Discussion Question: When should purchasing pursue negotiation with suppliers (instead of competitive bidding only)? Discussion Question: What areas or issues besides price often require negotiation between a buyer and seller?7Negotiation FrameworkPlan for the NegotiationPreparation and planning are considered the most important part of negotiationA plan is a method or scheme for achieving a desired end. Planning, therefore, is the process of devising methods to achieve a desired end Common planning weaknesses--Failing to commit sufficient timeFailing to establish clear objectivesFailing to formulate convincing arguments or support for positionsFailing to consider a counterpart’s needsBelieving quick and clever is enough8Negotiation FrameworkPlan for the NegotiationThe negotiation planning process involves many activities--Determine who will participateIdentify specificobjectivesAnalyze strengths and weakness of each partyGather informationRecognize counterpart’s needs Identify facts and issuesEstablish a position on eachissueDevelop appropriate strategiesand tacticsBrief other personnelPractice the negotiation9Negotiation FrameworkPlan for the NegotiationDiscussion Question: How can a purchase negotiator practice a negotiation?Discussion Question: How does a negotiator know what negotiating issues are important to his or her organization?10Negotiation FrameworkPlan for the Negotiation--Establishing a Range on Key IssuesIf negotiators do not develop ranges for key issues, the likelihood of overlap decreasesWhy would a negotiator shift positions or change the range during a negotiation?Desire for the contract is strongNew or improved information becomes available and challenges the accuracy of the original position A major concession by one party supports other modifications or compromises by the other partyThe power relationship between the two parties forces one party to shift an original position or range11Negotiation FrameworkPlan for the Negotiation--Establishing a Range on Key Issues$11.00$10.50<$10.50$12.00 $12.50 $>12.50BuyerSellerMinimumMinimumTargetTargetMaximumMaximumIs there any overlap?12Negotiation FrameworkPlan for the Negotiation--Establishing a Range on Key Issues$12.00$11.00<$11.00$11.25 $11.50 $>11.50BuyerSellerMinimumMinimumTargetTargetMaximumMaximumWhere is the likely area of agreement?13Negotiation FrameworkConduct the NegotiationDeciding where to negotiate can be an important issueThe atmosphere surrounding the negotiation should be less formal wherever possibleSummarize positions and points of agreement throughout the negotiationRemove managers!Debrief after the negotiation session--identify lessons learned from the experience14Negotiation FrameworkConduct the Negotiation Research reveals that effective negotiators display certain behaviors--Willing to compromise or revise their goals, particularly when new information successfully challenges their position View issues independentlyEstablish lower and upper ranges for each major issueExplore almost twice as many options per issue compared with average negotiators15Negotiation FrameworkConduct the Negotiation Research reveals that effective negotiators display certain behaviors--Make almost four times the comments about the common ground between partiesGive fewer reasons for the arguments they advance (too many supporting reasons can dilute an argument)Make fewer counterproposals16Negotiation FrameworkExecute the AgreementA negotiated agreement represents the beginning rather than the end of the process A key part of executing a negotiated agreement between parties involve providing performance feedbackBuild on the success of the agreement17Power in NegotiationPower is the ability to influence another person’s or organization’s behaviorIndividuals and organizations bring different sources of power to the negotiating tableThe use of power can be part of a party’s negotiating strategyDifferent sources of power can have varying short and longer-term effects on a negotiation and a relationship18Power in NegotiationSources of Power in Negotiation--Informational PowerPerhaps the most common form of powerRelies on persuasion through the use of facts, data, and