March/April 2011, eSide Supply Management Vol. 4, No. 2
To ensure the best possible outcome, use this step-by-step approach to advanced negotiation preparation, every time.
For supply management professionals, negotiation is a vital part of the job. To be effective in these critical interactions, you must manage the area that has the most potential to influence any negotiation's outcome: preparation.
Successful preparation for a supplier negotiation should cover the following areas.
Topics. Defining the topics to be covered can be as simple as agreeing on pricing arrangements or as complex as defining the multiple terms and conditions outlined in a detailed services contract. Identify the issues for both sides by asking specific questions in the RFP/RFQ/RFI stage, or through preliminary discussions with the supplier.
I have found that drafting a list of performance expectations (product-cost visibility and service-level targets, for example), and sharing them with the supplier, helps to bring possibly contentious topics to the forefront. This step is critical to uncovering potential disconnects with your supplier's positions or proposal upfront, and preparing for them as needed.
Communication. Signal to the supplier the need for the negotiation session, with a list of unresolved topics. This communication provides the supplier with the chance to recognize areas that need to be discussed further, and to prepare its positions for the coming interaction.
Ranges. Determine, by topic, the ranges of acceptable outcomes for your side. To determine the ranges, analyze your options for resolving each issue, thinking through potential scenarios and eliminating any that might be deal-breakers. Each option should be assigned a value, and then (if it's not clear at this point) ranked or rated in order of favorability.
Of these options, decide which one is the minimum acceptable for resolution of the issue. In other words, it becomes the only option between settling with the supplier and walking away. Anything less would be considered a deal-breaker and should trigger the use of your best alternative to negotiated agreement, or BATNA, which we'll explore further later in the article.
For example, as a global category lead for a major restaurant conglomerate, I was tasked with negotiating an international contract that would give a new supplier 100 percent of our global volume of a product. Due to the proprietary nature of its product, the supplier would be a sole source.
However, before we committed in writing to award the volume to the new supplier, we realized we needed a lever on pricing in the absence of being able to competitively bid the business. The only solution was to verify fair pricing through access to the supplier's costs. Through preliminary discussions, I already knew company's vice president of sales was against sharing costs; but, I found some sympathy from the CFO. Knowing I had an uphill climb, I set our minimum acceptable position at getting agreement on cost visibility in broad bands of expense categories. Anything less would have been a bad deal for us.
The next step in the negotiation preparation phase is to elevate the minimum acceptable position a few notches to arrive at your opening position. This position should be somewhat aggressive, as you have fallback options. For instance, in the case of the cost visibility negotiation for the global contract I mentioned a moment ago, my opening position was to have a fully detailed cost bar in place for the supplier's products, including profit information.
Finally, do not neglect to determine your "go for it" add-ons. Imagine that things are going really well, and the supplier is giving you everything you hoped for. Don't leave anything on the table by not being prepared to ask for more. Create a list of additional stipulations you'd like to obtain, and continue to ask for them until the supplier declines them.
Tradeables. Another often-neglected area of negotiation — by even seasoned negotiators — is coming up with tradeables, those items which might have value for the supplier but cost you little or nothing. Having tradeables available to offer can influence the outcome in your favor.
The key to effective tradeables is to make sure you understand their value to the supplier. For example, does the supplier get value from being able to tout your organization as a new customer, thereby validating their capabilities to other potential customers? Such publicity costs you nothing, but it could be of value to the supplier. So, offering it in exchange for supplier concessions in other areas might serve you well.
Best Alternative to Negotiated Agreement (BATNA). Determine an alternative option in the event that the supplier negotiations don't result in your achieving the minimum acceptable position. This fallback position is often referred to as the BATNA.
BATNA should be less desirable than your minimum acceptable position. Case in point: The BATNA established for the global restaurant supplier negotiation was to develop an alternative product. I alerted our R&D team to the situation, and they let me know it would take as much as six months to accomplish this alternative, so this BATNA wasn't as good as our minimum acceptable position. However, having this stipulation in my back pocket meant I could hold firm to my position. Also, it would have allowed me to walk away from the table if the supplier hadn't finally agreed to provide an acceptable level of cost visibility.
To arrive at a successful outcome, advanced preparation is critical to your negotiation process. Be sure to devote the time required to follow the steps we've outlined here to establish the range of possible outcomes, your tradeables and BATNA. By doing this work in advance, you'll arrive at your negotiation session with the knowledge and confidence necessary to achieve the best possible solution for both parties.
Elizabeth Zucker is vice president of international sourcing at Krispy Kreme Doughnuts in Winston-Salem, North Carolina. To reach this author, please send an e-mail to firstname.lastname@example.org.
For more articles and resources on negotiation, visit the ISM articles database.
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