#15 & 17: Competitive Bidding Negotiation Strategy
Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, editor of Purchasing Today®. Additional information provided by Joseph L. Cavinato, Ph.D., senior vice president and NAPM distinguished professor of supply chain management for NAPM, Tempe, Arizona.
August 2000 Purchasing Today®, page 43.

Take out the emotion, concentrate on the facts, and see how negotiations will be conducted among the most strategic supply management organizations.

Most would say it's something out of a classic movie. In a smoke-clouded room, a blockbuster business deal is taking place. Parties from either side of the table eye each other, trying to see what's behind those eyes. Terms and limitations are tossed out as feelers. Each party is making discreet phone calls and having side conferences to play the cat-and-mouse game required during the "old" negotiation drama. The idea was to get a better deal than your sales counterpart, and authority, power struggles, and emotional haggling were the tools.

Enter the 21st century and a new look for negotiations. According to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," the negotiation process will become more complex and sophisticated because it will move toward more win-win relationships, relying on total cost as a criterion. This 1998 study, by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, says that supply chain benchmarks will be developed that will allow organizations to openly share information and make fact-based decisions. (See the box below for more study results.) The actual meeting of the minds will be to analyze and examine information, with both sides reaching the conclusions that are clearly best for the overall relationship. Negotiations will be fueled by data, not emotions.

In its extreme case, the negotiation almost becomes a non-issue. When measurable price, benchmark, and contract objectives are universally known, thanks to shared information, much less time is spent in negotiation and more is spent in formulating a plan or process for executing those goals. Many say that negotiations have historically been a somewhat inefficient process, as both parties are likely to have "left something on the table." The more data available, the less likely that will happen. What are the implications of such a model and how easily will supply managers be able to adapt?

True Colors Show

One major implication of this new negotiation frontier is that the true colors of an organization are more likely to show through. No longer will an organization be able to muscle a deal through with a business partner if the facts do not exist to substantiate the agreement. As people sit down to analyze fixed and variable costs and develop total cost models, an organization's areas of competence and incompetence become clear.

Second, in order to have these types of discussions at all, individuals possessing the financial and analytical skills necessary become absolutely key. Understanding the entire supply chain and the causal relationships within it will help negotiators reach agreement. Imagine negotiating with a supplier on the subject of delivery. The only way to truly understand what is reasonable for the given infrastructure is to know the delivery capacity of various channels, the cost associated with additional services, and the expense of the supplier's processes, not to mention what is a reasonable profit for the supplier as well.

Larry Smeltzer, Ph.D., professor of supply chain management at Arizona State University in Tempe, Arizona, says that not all supply management professionals are ready for this change. "It requires a higher skill level and some would rather not take the time to do the homework required to make it work," he says. "Some still feel much more comfortable going to the table to talk things over, using personality, emotion, and psychology as the deciding variables." Smeltzer says that as more individuals are trained in this area and the organizations that do practice the new model begin to see successes from it, more and more fact-based negotiations will occur.

Once the supply community embraces the philosophy, there will be a greater push for the technology that can help to facilitate such a scenario. Because documents and information can be so readily shared over the Internet, positions and counter positions can be exchanged as attachments, geographically distant groups can review proposals simultaneously, and the face-to-face negotiation won't always be required. Smeltzer says he has observed negotiations in which the organizations facilitated the process almost entirely via the Internet. In one case, total cost analysis was completed, benchmarks were agreed upon, and there was literally not much to discuss.

Applicable to All?

Will this predicted trend in negotiations be applicable to all purchases? Within the common quadrant approach to strategic supply management (making four categories based on high- and low-value in relation to high- and low-cost products or services), the areas that were most applicable to price-based negotiations and the traditional "haggling" were low-value generic items and raw commodities. Today and in the future, this activity is being replaced by electronic auctions. In those situations, negotiations may be done beforehand with a group of suppliers, and then the qualified suppliers - all with pre-negotiated terms and conditions - would be the only ones to participate in the electronic solicitation/response process.

Smeltzer says the whole scenario can be deceiving. Supply management professionals might decide that the organization is going to start purchasing all office products from one particular supplier's electronic catalog, therefore negotiation is not as important. "Wrong," he says. Now the supply manager will be negotiating all the terms and conditions of using this catalog, ordering and receiving the product, and service requirements. "It's not the price of pens or pencils that is the most important anymore, but the entire relationship with the company, which is much more critical," Smeltzer says. The effect is magnified even further if supplier consolidation occurs because then volume will most likely increase. "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" also says that oftentimes, in the scenario described above, it might be a third-party provider, who has taken over management of low-value, high-volume items, that will end up negotiating on behalf of the buying organization.

This raises the question, "What is the fate of the traditional purchaser who has been trained and is skilled at mere price haggling?" They, like many other professionals who do not make the shift to strategic supply management, will find a world where their services might not be needed. However, those who do make the shift will find that relationship-based negotiation skills will be put to use extensively. In fact, they may become one of the most powerful tools an organization can have. In supply management alone, there are several instances of how negotiations and first-rate professionalism beyond the executional level can contribute tactically and strategically to the firm's objectives. Some examples include:

• Negotiate a service agreement that contains many elements of work, such as information technology outsourcing or systems development.
• Research and understand cost drivers and behavior for the cost-focused negotiations that lead up to the target price.
• Negotiate having a supplier give preference to the buying organization for technologies that are in short supply.
• Research outsource opportunities, negotiate the agreement, and stretch beyond contract administration to be the leader or manager of the arrangement with the supplier over the life of the contract.
• Champion a new technology or product idea.
• Be the focus person of the organization with a long-term supplier when the required benefits and objectives change from simply product-for-price to other integrated services, such as logistics, sharing developmental ideas, jointly taking a new product or service to market, or co-branding a product.

The Inside Story

In addition to the great strides that negotiations will take with suppliers and strategic business partners, negotiations have internal applications as well. The following are examples of how internal negotiations, performed by supply managers, will prove to be increasingly important:

• Lead and focus an internal team for a total cost solution that involves other strategic business departments.
• Facilitate "negotiation" discussions with senior managers in other departments for a supply initiative that is beneficial to the entire organization.
• Attain agreement on what key performance indicators (beyond price alone) the organization should use on a major supply initiative.
• Gain agreement across the organization for standardizing upon fewer specifications on internal equipment for total cost benefit. This often requires convincing the firm's engineering department to sign off on some complex specifications that were originally designed for the system. This can be an extremely difficult "sell" requiring the best internal negotiation skills.

As with many other facets of supply management, negotiations are taking the step forward that will help to propel the profession as a strategic player within the business community. Save the price haggling for the market bazaar and accumulate, communicate, and dissect the data for a winning supply relationship.

Initiatives #15 & 17: Competitive Bidding Negotiation Strategy

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, details 18 future initiatives that will shape the supply management function in coming years. The entire study is available on the CAPS Web site at www.capsresearch.org. From the home page, select Research, then Studies Completed. You'll see a link to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." This month, Purchasing Today® provides commentary on two aspects of the study: Initiative #15, Competitive Bidding, and Initiative #17, Negotiation Strategy. The study offers the following predictions.

• Competitive bidding will continue to be used to ascertain market prices and award business.
• Many organizations will take bids for nonstrategic items, but many of these items will be outsourced, so third-party buyers will conduct the bidding.
• Negotiations will become more intensive because of greater price and cost availability.
• Supplier negotiations will not be combined with customer and/or labor negotiations.
• Negotiation strategy will continue to move toward win-win relationships.
• Organizations are looking at total cost as a criterion and win-win relationships are a must.
• The trend will continue and expand as supply chain benchmarks allow firms to measure supply chain performance.
• Negotiations will not become less important, but will become more complex and sophisticated, relying less on emotions.

Talking Negotiations

Because "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" predicts a more intense, complex, and sophisticated look for negotiations, it means that organizations will have to prepare. The following questions are ones that a supply manager can ask to assess whether or not he or she is prepared with the new skills needed for 21st-century negotiations:

• Are you well-versed in the financial analysis skills required for total cost analysis?
• Do you feel comfortable exposing sensitive information about the organization during the negotiation, knowing that if both parties are willing to do this, it will optimize the supply relationship?
• Have you briefed third-party providers on your objectives well enough that they are prepared to negotiate on your behalf?
• Have you devised a commodity strategy that allows your organization to interpret which negotiation strategy to use in particular types of buys?
• Have you investigated benchmarks within the supply chain or industry with which to measure your performance?
• In the past, has your organization used technology as a complement to personal relationships or used it as a replacement?
• For those times when technology and electronic tools are used to facilitate negotiation, have you optimized the means of communication, such as the written word and presentation?
• Are you able to remove the emotion from the "traditional" negotiation?