Joseph L. Cavinato, Ph.D., C.P.M.
March/April 2008, eSide Supply Management Vol. 1, No. 2
Mastering the 5 Levels of Skill Required Today
In the supply management profession, negotiating what you want is the floor on the way to more demanding capabilities. It is just one of five levels of negotiations required of us if we are to be effective in our roles in this day and age.
Nearly every conversation we have is a negotiation of sorts: in the workplace, at home with our partners and especially with our teenage children! We want something. We want to convince someone else of something. We want to get buy-in. We want to defend something.
Dealing with a supplier when we want to get a good price is just one form of negotiating.
Level-one negotiations are the basis of the supply management profession. Whether this is done face to face, by phone or even by e-mail, the goal is to get the best outcome for our organizations while leaving as little as possible on the table for the other side.
Approaches here include games, marketplace intelligence analysis, buyer-seller balance assessments and planning the negotiation. The key is to know how much time and effort to invest in relation to the amount of benefit that might be gained. This is about getting price.
It used to be that buyers negotiated a supply and then, in many cases, turned over the day-to-day matters to someone inside the company: the user. Today, the original negotiation is more often than not just the starting point, and the supply management professional oversees the relationship for its duration. Day-to-day matters include logistics, quality issues, planning for future deliveries, handling billing and payment matters, arranging inventory flows and more.
Additionally, most signed contracts do not reference all the possible issues that might arise over the course of time. Here, supply management professionals are ongoing negotiators in the balance between their own companies and organizations and those of the suppliers. This is about making the flow and link work and be efficient.
Whether it is an outsource agreement or a long-term material or service contract, these negotiations are more complex. Both sides depend on each other in different ways.
Today, supply management seeks not only price, but assurance of supply in tight markets. Using fewer suppliers for more and more of an organization's needs offers advantages in price, cost, quality and flow-relationship advantages. It also, however, poses risks.
Many large outsource agreements fall into this group. Downside issues which require watching include switching costs, and using a supplier that is not as competitive as an alternative one. Also, a supplier's costs and performance strongly affect one's own organization in direct and indirect ways.
Level-three negotiation involves short- and medium-term marketplace intelligence assessment, strategic analysis and widespread input for planning and executing the negotiation, as well as scoping out how to lead and manage it over its term. It is essential to enlist internal stakeholders to capture organization-wide attributes of value to be sought and an understanding of performance metrics used throughout the organization. This is about capturing value needs and identifying how to communicate and attain them in a negotiation with the supplier. It also involves knowing how to conduct the ongoing supply relationship and internal flow matters after the agreement is in place.
Supply management is no longer the island it used to be. For decades, it would determine how to negotiate with a supplier and how best to get deliveries and maintain quality. Much of supply management stopped at the factory door, until the next purchase was needed.
Today it plays a concierge-like role, capturing the needs of services/manufacturing, quality, logistics, accounting/finance, IT, field service, product design and more. In many ways, supply management professionals find it more difficult to deal with internal stakeholders than outside suppliers.
What is necessary today is more than just a stated quality, quantity and price; other needs include special logistics flows, performing value-add (which used to be done in-house), developing new variants on existing products and services, and pure innovation. The supply management professional's job is to identify, define and create metrics for what those throughout the organization need from a particular supply. Then, they must turn around and define these in terms that are useful in contract form — terms the supplier understands and can abide by.
Partnerships and alliances exist when suppliers and buying organizations compete for the same customers against other suppliers and buying organizations in the market. These high-end relationships tend to develop in two ways.
One is a long-term relationship with a supplier that deepens and widens over time. (It can be likened to the progression from dating to going steady and, finally, the point at which an agreed-to relationship is identified and committed to.) These alliances tend to be strong, because they were built upon long-standing links which involve many people in one's own organization, as well as in the supplier's. The supplier understands the culture and day-to-day needs of the organization, and this level of negotiation is often an affirmation of these attributes.
The other type of relationship is borne of a need to use a new supplier for such things as innovation, or a new, high-volume flow or provision of service. It is a difficult relationship for supply management professionals because the supplier is new, many items of agreement must be identified and agreed to, and there is a risk of covering non-performance with the untried supplier.
Partnerships and alliances are about creating, leading and managing internal and external relationships over time with a widespread set of value capture and attributes. Many negotiations are discussions of mutual information sharing and discovery.
As the supply management function expands and reaches greater depth within organizations, more and more of these professionals will be expected to perform in most or all five levels of negotiations. With leadership and management increasingly being called upon to use influence and reach in different ways, this might be the ultimate 21st-century management capability.
Joseph Cavinato, Ph.D., is the ISM Professor of Supply Chain Management at Thunderbird School of Global Management and the Director of the A.T. Kearney Center for Strategic Supply Leadership at ISM. At Thunderbird, he heads the budding Global Supply Leadership Program. He taught at Penn State University and University of Georgia. He sits on the boards of Black Jag (Dubai and Mumbai) and Ultra Puro Technologies (Mexico City).
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