Negotiation

What is it?
Negotiation is the process used to :
- Close the purchasing deal with the supplier
- Set the price and the contractual conditions
- Resolve conflicts
- Manage incidents.

One of the key to successful negotiation is the use of a structured process for preparation.

When and why to use it?

Negotiation techniques are to be used at each contact with the supplier implying a stake
(that’s to say almost every time). Negotiation is one of the most suitable practices to
convince, lower cost, and solve incidents. Negotiation can be used at each step of the
purchasing process :

Purchasing process’ step Negotiation is useful to…

Definition of the need - Convince the internal customer to agree on
adjusting its demand to the supply market
- Argue on financial impact of technical
decisions
- Argue on the utility of your participation to
the upstream phase
Analysis of the market - Convince market actors of the interest of
giving you the information you need
Selection of suppliers - Argue on your purchasing potential and
your purchasing strategy
- Convince suppliers to answer your RFI and
RFQ
- Convince suppliers to give you their cost
breakdown
Negotiation and contracting - Get the best deal from your supplier
- Convince a supplier to participate in a
reverse auction
Supplier evaluation and follow up - Resolve conflicts
- Solve delivery incidents, quality incidents

Tool description
Negotiation process can be described using 5 steps :

Step 1: Prepare
This step represents 50% of the negotiation success. Preparing the negotiation means :
- Analyzing the environment
o Internal: current needs, time frame, prior commitment with supplier, …
o External: market trends, supplier’s need for business, current customers, …

© EIPM 2004 – Toolbox – Negotiation 1

 o Account details: quantities (past and future), supplier performance (quality,
service, delivery, price…)
o Relationship and history: conflicts, joint problem solving projects,…
o Culture specificities: meaning of time, hierarchy, relationship, communication
patterns…

- Fixing and prioritizing objectives

o List all clauses to be negotiated
o Identify the importance of each clause to the buyer and to the supplier. The
importance for the supplier is an assumption based on prior discussions with
the supplier, market information on the supplier’s company and its
competitors, etc.

For example:

Predicted
Supplier’s Buyer’s
Clause Buyer’s objective supplier’s
last offer ranking
ranking
Price $3 000 000 $2.5 M < objective < $2.8 M 2 2
Lead time 6 months 4 months 1 3
Packaging/
2% of price Free 3 2
Transport
Guarantee 1 year 2 years 1 1
Payment terms 30 days 90 days 1 2
Delay penalty Not foreseen 2% if more than 3 days 2 3
Stock Not foreseen 2 weeks 1 2
Setting up $50 000 Free 3 3
Training $35 000 Free 3 1
1 – Non negotiable 2 – Can be explored 3 – Completely negotiable

The buyer can also add to the objectives of each clause the realistic (or acceptable) target
and the breakpoint

- Setting up a strategy;
o Discuss and define with the buyer’s team which strategy to use:
o Which sequence of clauses to negotiate. There is no “right” or “best”
sequence. The key is to have a agreed sequence within the team.

- Mapping the suppliers’ negotiation team

o Identify who is coming, why, their role and function and mainly their individual
objectives

- Defining the buyer’s team role

o Negotiator: is the leader of the process
o Analyst: supports the leader with data, calculates results, keeps track of
objectives
o Observer: looks for the weak signals, asks for breaks

Step 2: Explore and exchange

This step is the very beginning of the negotiation. It allows to understand your opponent’s
pressure and objectives and to explain your own objectives. Communication and listening
skills are most important here.

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 o Ask questions to validate the assumptions regarding the importance of the different
clauses. For example, asking questions about the latest order the supplier has
received from major customers may give the buyer an idea about the supplier’s
current available capacity and consequently its “lead time”.
o Check that there are no major changes in the supplier’s environment.
o Listen!

Step 3: Negotiate
This step is when your opponent and yourself make offers and proposals.

o Exchange concessions: always keep concessions conditioned to a counterpart. For

example: “If you reduce the lead time, I will pay in 30 days instead of 45”.
o Package clauses: put variables together to form groups of items that appeal to the
other party. For example: “I propose to pay in 30 days, have the goods delivered in 2
weeks and get the training free of charge”.

Step 4: Agree and close

This step is the end of the negotiation process when one of the opponents has accepted the
others’ offer. Once the agreement has been reached it will be formalized in a document
(contract, purchasing order…).

If during the negotiation process the negotiators team comes to a deadlock, it can:

o Call a recess/adjournment
o Change the terms, specification, etc
o Add other options
o Isolate the area of disagreement
o Offer small concessions
o Signal willingness to change
o Ask why they don’t want to agree
o Ask a third party to arbitrate

Step 5: Post negotiation

The negotiators have to follow up and to ensure the success of what has been agreed
(quality, cost, delivery,...)

Required resources
The resources you need to efficiently use the tools are:
- Information and preparation, which require a cross functional team to gather all
information required, identify and classify the clauses and define who shall participate
in the negotiation session.
- Available team members to participate in the negotiation.

Tool Limitations / Common Pitfalls

- Negotiation objectives can be hard to define due to lack of clear specifications and
expectations from internal customer.
- Most of the time the supplier’s expectations are not identified.

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 - Being objective is essential when analyzing balance of power. Try to have another
point of view, external if possible.
- Time for preparation is essential!
- Even though the preparation is important the negotiation team should have enough
flexibility to handle changes in the environment.

Attached tools
See the PowerPoint Presentation for Negotiation.
Fill in the Clauses to be negotiated grid.

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