Category Archives: Negotiations

What’s the Key to Effective Purchasing?

CAPS Research latest Practix, “The Key to an Effective Purchasing System: Is It Technology or Supplier Relationship Management?”, by Keah Choon Tan asks whether sophisticated and often expensive information technology is the only solution to improve competitiveness in response to the tremendous pressures of globalization and increasingly demanding customers. The study describes the lean but highly efficient supply management system of a world-class casino-hotel chain that emphasizes strategic supplier relationships over implementation of sophisticated information technology and that has developed a supply management system founded on a contemporary management philosophy that stresses long-term, mutually beneficial relationships, trust, and sole sourcing.

The goal of the article was to demonstrate that an effective supply management policy can be the key to managing the supply function effectively. The policy emphasizes the formation of strategic alliances to achieve the lowest total acquisition cost, rather than forcing suppliers to bid on each purchase – since this approach tend to focus on short term measures such as unit price. Once the strategic alliances are formed, the best suppliers are selected for each item based on quality, reliability, delivery, and total acquisition costs and blanket orders are issued. Furthermore, to update and continuously improve centralized blanket orders, the company has processes in place to enable suppliers to solicit new business and chefs to request and receive samples and pricing information.

In addition to sole sourcing, the company also employs supplier performance monitoring, continuous evaluation, and competitive bidding when a new product, or source, is needed. The company also has well-defined, rigid, supplier selection criteria which include competitive pricing, quality standards, reliable services, processes, and delivery, the ability to provide niche product and design concepts, financial stability, provision of warranties, insurance and bonding, proven performance standards, and excellent service and support.

The study then deduces that implementing an appropriate process is the key to solving business challenges, and information technology is merely a tool to facilitate the process. Furthermore, the study notes that the process has led to time savings, cost savings, accuracy, waste elimination, and improved control without the support of much in the way of information technology.

Although I’d have to agree that the process is key, I don’t think the study stresses enough that it was based on the restaurant services arm of a casino hotel chain that has only eight locations, all of which require essentially the same items. This is not very sophisticated supply management. For an operation of this size, good processes backed by Excel and Access are pretty much guaranteed to get results (but not necessarily great results, especially from an efficiency standpoint).

Thus, although it’s a good report – it’s also a dangerous one. There’s no way this would work for a major fast food chain if it did not have good sourcing and procurement systems to back such a strategy up. Although tools alone do not a successful sourcing process make, without tools, the supply management team of any chain of even just a few dozen locations would quickly become swamped under information overload and be unable to keep track of who is supposed to ship what where, whether or not performance is acceptable, whether or not quality is acceptable, and whether or not they are truly getting the best price. Although a sole source strategy backed up only by good supplier management is often a great approach for a small business, without good technology to back it up, it just doesn’t scale!

A fool and his money are soon parted … don’t be a fool!

Timeless Principles To Steer You Through Negotiations

Over on The Negotiator Magazine, Eric Garner recently had a great article on “Timeless Principles To Steer You Through Negotiations” that listed seven principles of negotiations that define a sure-fire way to succeed.

The list, which also included 7 timeless quotes, one per principle, is as follows:

  1. Negotiating is an essentially human way of interacting.
  2. Negotiating is not about dividing up a limited cake in ways that are divisive. It is about making a bigger and better cake.
  3. Conflict is at the heart of negotiation but only a positive view of conflict will result in a successful outcome.
  4. There is a time to speak and a time to shut up in negotiations. When you do more listening than speaking, you actually increase your power.
  5. In power negotiations, when the stakes are high, let the other side believe what you want them to believe. But don’t lie or be dishonest.
  6. Recognize that you will only reach agreement by understanding the deeply-held needs of the other side.
  7. You can only succeed in negotiations with a win-win attitude.

Essentially, you’re dealing with a person, and you’re only going to succeed if you approach the negotiations with integrity, listen to the other person, and reach an outcome that both parties view as a success. Strategy, tactics, and textbook methodologies will be useless if you forget these basic points. Writing anything further would just miss the point.

The “When and Why” of Incumbent Negotiations

I recently came across a recent edition of Procurement Insight from CGI by Denise Dattomo and Chuks Amajor entitled “Incumbent Negotiations: When and Why” that reviewed 7 situations where incumbent negotiations may be more attractive than competitive procurement which was quite good. Although comprehensive competitive bidding approaches are typically the right way to go, direct negotiations with incumbents might be the the right choice under certain circumstances. CGI has found that, based on their experience, incumbent negotiations yield an average savings of 9%, and sometimes the savings can be (much) higher. Furthermore the effort, and cost, involved in incumbent negotiations is usually lower. The seven situations that are often appropriate for incumbent negotiations are:

  • Urgent need for quick results
    An incumbent negotiation can often be accomplished in as little as six weeks.
  • Small spend, but high potential ROI
    There are often “quick hit” opportunities in categories with lower spend, especially those that are straightforward goods and services.
  • Strategic Vendor Relationship
    For example, if the vendor is also a client.
  • Strong end user preference
    An influential end user with a strong preference for an incumbent vendor may refuse to consider switching to a new vendor.
  • Significant Market Changes
    If a new, alternative, product is introduced by a competitor, and such product is cheaper, the current vendor may be quite willing to offer concessions in negotiations.
  • Prohibitive Switching Costs
    If the savings generated from a new, more competitive, contract could be outweighed by the cost of switching, renegotiation may be the most attractive option.
  • Limited Vendor Pool
    If the vendor pool is limited, a competitive bidding event could turn out to be a fruitless endeavor. In such a situation, going directly to an incumbent negotiation might be the best thing to do.