8. Negotiating

Just about everything we do in supply chain management comes down to a negotiation. The knowledge, skills, and innate talent that supply chain managers bring to this area of expertise determine what their supply chains become. Negotiating with suppliers to achieve a contract that benefits both parties should be the goal of any negotiation.

During the course of our usual monthly phone conversation, my VP for our Medium-Sized Engine Division, Barack, shared a concern he was having about his chief buyer, who works directly for this Supply Chain Department Head, Todd. “Bill, you and I have enough years in the business to know that negotiating contracts with suppliers is critical and needs constant skill-development efforts. Our chief buyer, who works under Todd, our Supply Chain Department Head, appears to be slipping a bit. One of the contracts I had to sign off on seemed overly pricey to me. I asked Todd the specifics about how, where, and when it was negotiated only to find very little negotiation went into the process. The deal was done in one day. I don’t have all the specifics on what the chief buyer process was, but between the inflated prices we are paying, relative to other suppliers I found to benchmark off of, I believe we can do a whole lot better in negotiating,” Barack said.

“Barack, as you know from your own experience as a buyer, more than likely you don’t get your contract on your first sit down with a supplier, and if you do, you probably haven’t pressed as hard as you should have. The fact that your chief buyer was getting contracts negotiated in a day should have been a red flag to Todd to investigate what was happening. As a rule, the negotiation process is very iterative, going back and forth, gathering more information and taking considerable time and effort. Let me ask, how much prep work does your Division do before they enter into any supplier negotiations?” I asked.

“Basically, they take bids on what we need and factor in other services in addition to pricing with three suppliers. Beyond that, there is not a lot of prep work before entering into negotiations. The chief buyer feels his continual understanding of current market prices is adequate for the negotiation processes we use.” explained Barack.

Bill was surprised to hear this and replied, “You were right to contact me on this issue. I started my career in supply chain management as a buyer and know what it takes to build a supply chain network with suppliers through negotiation. Barack, your chief buyer’s approach is not an adequate process. We trust your Division to spend millions of dollars on our behalf with our suppliers. A much more careful and inclusive effort must be expended in future negotiations to ensure you are all doing the best job you can to support our supply chain activities.”

“What do you suggest, Bill?” asked Barack.

“There are some basic concepts in the negotiation process that are needed to be put into place to ensure mutual benefit in contractual relations with our suppliers. In negotiations, which don’t always lead to a contract, and we sometimes have to walk away from a deal. We should strive to have a win-win situation that benefits the supplier as well as us. We don’t want to drive our suppliers out of business because they give us the lowest cost they cannot themselves afford. That will not result in a sustainable supply chain. In fact, we should look at suppliers in terms of other things they may bring to our operation, like world-class delivery service. Your people need to know that they are negotiating good terms and conditions, and that you’re getting favorable treatment, but you are also managing your best total cost of what is important to you. Total cost includes more than just prices. Again, extra services that the supplier provides may have value that would otherwise cost you extra with other suppliers. It’s important to lay out what is of interest to us and let the supplier lay out what is of interest to them in the negotiation process. Remember that negotiation doesn’t mean you will always end up with a contract. Negotiation means you are just trying to identify terms and conditions by which you can interact with a supplier. Some of the time that leads to a contract. Now, your people should know that if we have to fall back on a contract to make suppliers do what they have agreed to do, it does not lead to a sustainable supply chain. Contracts are put into place by lawyers to give organizations some risk-avoidance protection, but to use it in a dependent relationship-intensive supply chain is very heavy-handed and will not foster the kind of partnership needed for a supply chain to grow. Ideally, we would like to have suppliers that help us in many of our areas of production like in the Design Stage to help us select materials and make the products as efficient as possible. These are the kinds of extras that some suppliers give and why just looking at prices is not the best policy in negotiating,” I explained.

“Bill, the framework you have mentioned here is conceptually good, but I have to have my subordinates actually sit down with suppliers and negotiate contracts. What tactics can you share with me that I can share with them about the actual interaction that takes place during a negotiation?” asked Barack.

“Barack, negotiation is a dance where one side leads for a while and then the other side may try to take the lead. The dance is iterative, back and forth, filled with surprise, mystery, and game playing. When your negotiation team sits down across the table from you, don’t let them assume the opposing team will be honest in everything they say or do. They may give you shades of truth to tease information out to use against you. Your team will have to do the same. International negotiations are sometimes unique. For example, I have observed that the more pressure you put on foreign negotiators whose language is something other than English, the faster they start losing their English skills and have trouble understanding English. Again, that is just a negotiation tactic. There will be a lot of posturing. For example, in some of the negotiation teams I brought 2 people while my opponent brought 20 people. When you go into a negotiation, you have to decide what it is you want from a supplier and what you are willing to accept at minimum. As you know, that is called the best alternative to a negotiated agreement (BATNA), or what we will do instead of doing the agreement with the supplier (our backup plan). Your chief buyer needs to gather data about industry pricing, and it should be based on more than just three suppliers. It should be industry-level information on all the commodities that make up the products we seek from this supplier and include what is going on in the industry, government, and any other markets for our products. In addition, your chief buyer should also collect information about the supplier’s performance on delivery, production capacity, and technology capability to ensure that they have a good record and capacity sufficient for our needs. If you know the current or previous prices for a component part, and you have information on the pricing trends on the raw material commodities used to make that component, you can forecast at least if the price for the component should be going up or down. Then you should factor in the value added of the supplier by comparing the extras that other suppliers might be offering. Consistent with your current practice, you should be in negotiation with at least three different suppliers. Now, having done all that, you are ready to confront the suppliers. On very important contracts, you, your Supply Chain Department Head, and your chief purchasing manager should at least be on the negotiation team. Sometimes we have to play games, like “good cop, bad cop,” to move the discussion along. In other situations, things may move too quickly, and in those situations we may want to slow things down by caucusing or just leaving the room to go elsewhere to discuss what is or maybe is going on in the negotiations (like people lying to you or playing games as well). Some of the supporting team members whom we can caucus with might include the negotiation team, product engineering personnel, and quality managers. Of course, you might just be exhausted and need a break from the negotiation efforts. When you come back, you need to put on your game face. Do not let the opponents know what you are thinking or that what they may have said bothers you. Fortunately, as you develop your relationship with this supplier over time, the negotiation process gets much easier and quicker,” I commented.

“Thanks, Bill, all of this is helpful and I will bring it back to Todd and others in my Division,” stated Barack.

“Barack, may I also suggest you utilize a negotiation training organization, like Karrass (www.karrass.com/), to build your team’s negotiation skills. Two of our other Divisions use outside training organizations for their new and experienced buyers and management. Negotiation trainers are a great way of staying up-to-date in this critically important supply chain skill area,” I suggested.

8.1. Prerequisite Material

The various stages in the product life cycle for any product alters demand and in turn can change the relationships with suppliers. At each stage in the product life cycle, new contracts/agreements have to be negotiated or renegotiated because product demand has altered. This necessitates negotiation skills for anyone who hopes to have a supply chain management future.

On an esoteric level, negotiation is a dialogue between people or parties who seek to reach an understanding, resolve a point of difference, or gain advantage in producing an agreement upon courses of action that both parties will follow. Negotiation is intended to achieve a compromise between two parties, with each party trying to gain an advantage at the end of the dialogue process.

Supply chain negotiations commonly follow an advocacy approach, where a skilled negotiator serves as advocate for one party (for example, a purchaser) in negotiation to attempt to obtain the most favorable outcomes possible from the other party (for example, a supplier). (We use the purchaser and supplier relationship paradigm throughout this chapter.) In this negotiation process, the negotiator (which could be a lawyer, contracts specialist, purchasing agent, a business executive, or in complex situations, a whole teams of individuals) attempts to determine the outcomes that the other party (for example, supplier) is willing to accept, and then adjusts the purchaser’s demands accordingly. In this context, a successful negotiation occurs when the negotiator is able to obtain all or most of the outcomes his or her party desires. Negotiating is sometimes called win-lose strategy because of the assumption that one person’s gain results in another person’s loss. This is not true except in the most limited of negotiation situations, where participants are playing a zero-sum game (that is, what one gains, the other loses).

Table 8.1 describes a typical negotiation process as suggested by the Institute of Supply Management (ISM). As shown in Table 8.1, a great deal of analysis is needed for most any negotiation for the purchaser and the supplier to maximize their positions and to benefit their respective organizations. Like prepping for a debate, both parties must seek an outcome that achieves a winning compromise. Before the actual face-to-face negotiations take place, both parties should be positioned to know the needs of the other and what can be done to provide need satisfaction.

Table 8.1. ISM Overview of Negotiation Process

Source: Adapted from Carter and Choi (2008), pp. 149–183.

8.2. Guiding Principles in Negotiating Agreements

There are only two things important to supply chain managers in the theory of negotiation: what they want, and how to get it the way they want it. What purchasers want is a winning agreement with a supplier that serves their supply chain needs to their best advantage. Likewise, suppliers want a winning agreement to serve their needs. How to obtain an agreement for both parties involves knowing how to undertake negotiation using the right negotiating strategies and tactics.

8.2.1. Winning Agreements

Winning agreements today are those that are transparent and detailed and provide a comprehensive statement of what both parties want and expect. There are many ways to achieve such agreements. The guidelines presented in Table 8.2 are a beginning framework to verse supply chain managers in the general content that should be included in the process of generating purchasing agreements.

Table 8.2. Principles in Guiding Content in Negotiating Purchasing Agreements

Source: Adapted from Schniederjans et al. (2005), pp. 62–63.

8.2.2. Negotiating Strategies and Tactics

Currently, supply chain management is moving too rapidly to waste time making agreements that may have little impact on a firm’s bottom line. That is not to say negotiation efforts of supply chain managers do not make major contributions to a firm’s bottom line; but long, protracted “game playing” is becoming an obsolete practice. However, some game playing might enable a purchaser to procure the best deal from a supplier. Old hardball practices (for example, “good guy, bad guy” or offering a “red herring”) will not lead to successful negotiations.

So, where does a winning negotiation strategy come from? It has been observed that some negotiators possess and use a particular style of negotiation. There are many styles a negotiator can adopt, and each has its own advantages and disadvantages (see Table 8.3). Understanding the differences in styles can help a supply chain manager identify underlying behavior that impacts agreement negotiations. For example, if supplier’s negotiating style is accommodating, the purchaser’s negotiator might be able to take advantage of this sensitivity to weaken or disrupt the negotiation process to the purchaser’s advantage.

Table 8.3. Negotiation Styles

Source: Adapted from Shell (2006), pp.112–145.

No one formula or single strategy can fit every situation in a negotiation process. The best advice for developing a winning strategy is to develop one that contains elements of criteria characteristic of winning strategies for negotiation. Table 8.4 describes a number of winning strategy criteria. As a check list, the suggestions in Table 8.4 can help supply chain managers avoid oversights in negotiation strategy development.

Table 8.4. Criteria for the Development of a Negotiating Strategy

Source: Adapted from Fawcett et al. (2007), pp. 361–368; Carter and Choi (2008), pp.178–181.

Once a general strategy is planned, tactics to help implement it are needed. Many different tactics can be used in a negotiation process. Table 8.5 describes some of the more commonly used tactics. Which ones you use depend on the preferences of the members on the negotiation team, the nature of the strategy selected, and the primary goals for the purchaser in the negotiation process.

Table 8.5. Common Negotiating Tactics

Source: Adapted from Fawcett et al. (2007), p.366; Carter and Choi (2008), pp.178-181.

8.2.3. Select Best Practices

In general, supply chain managers have found solace in a variety of best practices recommended by colleagues in industry. These best practices change over time. Robinson and Harkness (2011) suggest some best practices should be part of every negotiation strategy, no matter who is on the negotiating team or whether the team is negotiating for a product or a service:

• Silence is golden: Do not engage in outside communications with a supplier during ongoing negotiations. This does not violate the principle of transparency and openness. Some suppliers try to gain competitive information in outside communications that could be leveraged against the purchaser during contract negotiations.

• Maintain secrecy in approved budgets: Do not disclose information about approved budgets, nor about the internal vision for investing dollars in specific projects or whether a project is part of a key initiative or imperative for the purchasing organization. Information on any of these topics could indicate to a supplier that they have the upper hand and in turn could disadvantage the purchaser during negotiation discussions.

• Provide adequate timing: Allow the purchasing organization enough time to work through the negotiating process and communicate this is all parties. Business deadlines should not dictate negotiation strategy and execution.

Another important best practice concerns getting started in the negotiation process. In the beginning of any negotiating process, supply chain managers should maintain tight control over individuals taking part. Every participant should have a clear role and an intended purpose. All business organization staffers with a stake as internal customers should be included during strategy sessions as candidates for the negotiating team. Once the trusted potential members of a negotiating team are identified, supply chain mangers can then decide on the approach most beneficial for the assembled team. It is critical that all internal participants are in lock step with their roles. They should understand the ultimate strategy of the supply chain leaders in the negotiation process.

The outcome of the negotiation efforts is a final agreement that both parties agree on and that should benefit both. The amount of time and effort spent on negotiation of purchasing agreements is usually in direct proportion to the importance of the agreement to both parties. The suggestions offered in this chapter are a starting place and provide general guidelines for a negotiation process. Unfortunately, many issues can occur during the negotiation process and must be dealt with to have a successful agreement. Some of these issues are discussed in the next section.

8.3. Other Negotiation Topics

8.3.1. Overcoming Negotiation Roadblocks

Robinson and Harkness (2011) have suggested that when a planned negotiating strategy is not successful in reaching the desired result, bringing in executive leadership may be appropriate. Timing their entrance and understanding their roles are critical success factors in the use of this strategy.

Experienced or not, negotiators can usually tell when suppliers are stalling or when progress on issues is slowed or halted on purchasing agreement negotiations. Moving things along sometimes requires that negotiations move to the next level, in which the purchasing organization makes a declarative statement to show how serious it is about negotiation efforts. The strategy to break the stalemated process involves bringing in executive oversight. When a high-ranking executive is brought into the process, a clear message is sent to the supplier that the negotiation is strategic to the purchasing business. It can be an effective message communicating the purchasing organization’s desire for alignment and achieving an equitable solution for all parties. Negotiations usually take on increased attention when a high-ranking supply chain professional is engaged.

Once the high-ranking executive has decided to enter into the negotiation process, it is important that the strategic role of the executive be clearly defined, as is the case for the entire negotiating team. The executive’s role, according to Robinson and Harkness (2011), should be confined to when an agreement is nearly complete or when there is a stalemate that can be broken only by discussing or changing internal policy. For example, in an agreement close to completion there may be a few final high-level items that must be incorporated as part of the contract. Robinson and Harkness suggest that is when it is appropriate for an executive to step in. If the executive decides the proposed conditions are met, the negotiated agreement can be finalized.

Robinson and Harkness also suggest that it is critically important that once the supply chain executive is engaged, he or she should not disengage, because the negotiation team will appear weaker if the leader leaves the proceedings for any reason. An executive disengaging or stepping back from negotiations may be interpreted by the supplier that that particular executive is the decision maker who will need to be consulted prior to negotiations being finalized. This may be perceived by the supplier as reduced roles for the rest of the purchaser’s team, and in turn, may diminish the team’s ability to conclude the negotiation.

Bringing an executive into the negotiation process should always be accomplished in a precise manner to achieve a very specific goal. Because the negotiating process changes when a supply chain executive steps into the proceedings, executives should follow two key guidelines to direct negotiating tactics:

• Focus on problem solving in negotiating: This requires an executive to focus on the larger issues, such as long-term strategic vision, research and design initiatives, and collaborative long-term strategic partnerships. Avoid smaller issues that tend to only diminish the executive’s standing in the eyes of the opposing party.

• Learn from the supply management team: Before stepping into the negotiating arena, the supply chain executive should gain a full understanding of key challenges and the competitive landscape of the negotiation.

Executive-level support in the negotiating process can help supply chain organizations navigate the difficult negotiations and execute a successful agreement for all parties. A high-ranking executive, when engaged at the right moment with a clear and defined role, can be a catalyst to help negotiators arrive at a successful purchasing agreement.

8.3.2. Delaying Tactics

Stalling, according to Jensen (2011), is usually employed as a tactic to inspire uneasiness and doubt in an opponent. Stalling can also be used more ethically to buy time in situations where additional research or internal discussion is needed and also if the negotiator is worried about emotions bleeding into the work (that is, gives them time to cool off).

Like any delaying approach, there are risks in using this negotiation tactic. A supplier, for example, might read a sudden absence of communication or a delaying change in discussion as being combative. The effects of a delay may end up placing the purchasing team under even more pressure instead of buying more time. Indeed, a supplier feeling neglected might simply decide to withdraw the offer.

How can we know whether a supplier is stalling? There are several ways. For example, being asked to look at further documentation when all the necessary information to begin negotiation is already present may be a stalling tactic. Similarly, if a supplier’s negotiation team suddenly decides they are not qualified to negotiate, that may be a stalling tactic. In addition, always be on the lookout for the same questions or ideas being recycled.

The best practical way to deal with this is to use the same tactic. Jensen (2012) suggests taking the time the supplier negotiator provides by his or her absence and using it to the purchaser’s advantage. The extra time may be spent on analysis of the supplier to be better prepared when the supplier finally decides to return to negotiate again. The ideal option is to circumvent the situation altogether by setting timetables and deadlines at the outset. If the purchasing team expects stalling tactics from the supplier, they should make sure the supplier understands right off what is expected as far as scheduling is concerned.

Finally, purchasers should be aware that some supplier negotiators stall not as a ploy, but as a defense mechanism. If a negotiator does not appear to want to make up his or her mind, or uses overly formal language or obscure procedural issues, it might be to simply scale things back or take things slower.

8.3.3. Preparing for Supply Chain Negotiations

It is essential for purchasing teams to craft a clear strategy for the negotiation. This strategy should formalize the objectives to be addressed with the supplier negotiating team. It should also help to identify acceptable ranges of solutions for each negotiable element such as the maximum supportable solution (MSS) and least acceptable solution (LAS), as well as to clearly identify the best alternative to a negotiated agreement (BATNA) or fallback plan in the event that the negotiation is not successful. Developing the strategy is essential to the preparation work needed to enter purchaser/supplier negotiations. Negotiation experts recommend 75% of the total time spent in the negotiation process should be spent in preparation activities. These preparation activities should include data collection and analysis of suppliers and strategy development and education of the purchaser’s negotiation team. Unfortunately, the levels of preparation of the typical supplier negotiating team is substantially greater compared to their purchasing opponents.

According to Trowbridge (2012), a number of proven steps can be followed to prepare negotiators for even the most complex negotiations with suppliers, as described in Table 8.6.

Table 8.6. Winning Negotiation Preparation Steps

Source: Adapted from Trowbridge (2012), pp. 46–51.

8.4. What’s Next?

Many advances in negotiation theory are continuously appearing in the academic literature. Many of these advances are behaviorally theoretical and do not have much application for many years to come because of their unproven, theoretical nature. One area of development in the trend of negotiation practice is the use of automated technologies to augment and conduct negotiations.

As Ito et al. (2012) illustrate, technology can be used for active negotiations by permitting (or not permitting) revelation of information for decision making. An important and emerging area in the field of negotiation is the use of autonomous agents (that is, software that is at least partially autonomous) and multi-agent systems (that is, MAS composed of intelligent agents that are software applications with algorithmic and other procedural programming). MAS actually has the ability to share information using knowledge query manipulation language (KQML) (a software programming language to search for answers to queries). Autonomous agents and MAS can self-organize and self-steer efforts to control negotiation paradigms operating without human intervention. Autonomous agents can support automation or simulation of complex negotiations and can provide efficient bargaining strategies. To achieve such complex, automated negotiation, advances in artificial intelligence (AI) technologies (that is, logic and mathematical algorithms), genetic algorithm (GA) (that is, a search heuristic that mimics the process of natural evolution), and a particle swarm optimization (PSO) (that is, a computational method that optimizes a given solution through iterative steps) can be used.

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