CHAPTER 17: NEGOTIATION 365

seller knows that alternative sources are actually available and interested in
the business. An alternative threat which may be effective when patents are
not involved is the threat to manufacture the needed item in the buyer's plant.
When made realistically-when the supplier believes the buyer has the tech-
nical capability, the determination, and the capacity to make the product-this
threat usually gains concessions.
Afirm's negotiating position is always strengthened when the company has
a clear policy that permits only members of its purchasing department to dis-
cuss pricing, timing, and other contractual terms with sellers. Most prenegoti-
ation information leaks that give sellers a feeling of confidence about getting a
contract occur in the technical departments of a firm. Such leaks can be
extremely costly, and because they are often undetected by general manage-
ment, they can be a continuing source of profit loss.
Short lead times drastically reduce the buyer's negotiating strength. Con-
versely, they significantly increase the seller's bargaining strength. Once a sup-
plier knows that a buyer has a tight deadline, it becomes easy for the supplier
to drag its feet and then negotiate favorable terms at the last minute when the
buyer is under severe pressure to consummate the contract.
The Buyer's Bargaining Strength The buyer's bargaining strength usu-
ally depends on three basic factors: the extent of competition present among
potential suppliers, the adequacy of cost or price analysis, and the thoroughness
with which the buyer and alf other members of the buying team have prepared for the
negotiation.
Intensive supplier competition always strengthens a buyer's negotiating
position. Competition is always keenest when a number of competent sellers
eagerly want the order. General economic conditions can bear heavily on the
extent to which a firm really wants to compete. A firm's shop load, its inven-
tory position, and its back-order position are typical factors that also bear
heavily on the ever-changing competitive climate.
When necessary, a buyer can increase competition by developing new sup-
pliers; making items in-house rather than buying them; buying suppliers'
companies; providing tools, money, and management to competent but finan-
cially weak suppliers; and, above all, hiring highly skilled negotiators.
The Adequacy of Cost or Price Analysis A comprehensive knowledge of
cost analysis and price analysis is one of the basic responsibilities of all nego-
tiators. When an initial contract is awarded for a portion of a supplier's pro-
duction capacity rather than for a finished product, cost analysiS becomes
vital. In this situation, the negotiators are not prepared to explore with the
supplier the reasonableness of its proposals until after a comprehensive analy-
sis of all applicable costs has been completed. Cost analysis in such purchases,
in a very real sense, is a substitute for direct competition. For follow-on con-
tracts, and for contracts for common commercial items, price analysis is usu-
ally sufficient to assure the buyer that prices are reasonable. In the aggregate,
366 PART 3: SOURCING
the greater tile amount of available cost, price, and financial data, the greater the
buyer's chances for successful negotiation.
Know the Seller A professional buyer and members of the negotiating
team should endeavor to know and understand both the prospective supplier
firm and its representatives. Buyers at a leading East Coast firm prepare for
critical negotiations by reviewing financial data and articles dealing with their
prospective suppliers. The buyers and all negotiating team members know
how the supplier's business is faring, key personnel changes, and so on. This
level of preparation pays dividends when conducting face-to-face negotia-
tions!
The Thoroughness of Buyer and Negotiating Team Preparation Knowl-
edge is power. The more knowledge the negotiator acquires about the theory
and practice of negotiation, the seller's negotiating position, and the product
being purchased, the stronger his or her own negotiating stance will be. A
negotiator without a thorough knowledge of the product being purchased is
greatly handicapped. A negotiator is similarly handicapped if he or she has
not studied and analyzed every detail of the supplier's proposal. Whenever
feasible, before requesting bids, the negotiator should develop an estimate of the
price and value levels for the items being purchased. Knowledge of current
economic conditions in the market for the product in question is also an essen-
tial element of preparation.
Prior to the main negotiating session, all members of the negotiating team
must evaluate all relevant data and carefully assess their own and their sup-
plier's strengths and weaknesses. From this assessment, they develop not only a
basic strategy of operation, but also specific negotiating tactics. Alert suppliers
readily recognize negotiators who are not prepared. They gladly accept the
real and psychological bargaining advantage that comes to them from lack of
preparation by members of the buyer's negotiating team.
Establishing Objectives
The outcome of contract negotiations hinges on relative buyer-seller power,
information, negotiating skills, and how both perceive the logic of the impend-
ing negotiations. Each of these controlling factors can be influenced by adroit
advanced planning. This is why proper planning is without question the most
important step in successful negotiations.
Having prepared for negotiations, the next step is to establish objectives.
Negotiation objectives must be specific. General objectives such as "lower than
previous prices:' "good delivery:' or "satisfactory technical assistance" are
inadequate. For each term and condition to be negotiated, the negotiating
team should develop three specific positions: (1) an objective position, (2) a
minimum position, and (3) a maximum position. Using the cost objective as an
example, the minimum position is developed on the premise that every
CHAPTER 17: NEGOTIATION 367
required seller action will turn out satisfactorily and with minimum cost. The
maximum position is developed on the premise that a large number of
required seller actions will turn out unsatisfactorily and with maximum cost.
The objective position is the negotiator's be$t estimate of what he or she expects the
seller's actual costs plus a fair profit should be.
In developing concrete objectives, actual dates are established for delivery
schedules, actual numerical ranges for quality acceptance, and actual dollar
levels for applicable elements of cost. The major elements of cost which tradi-
tionally are negotiated-and for which objective, maximum, and minimum
positions are developed-include quantity of labor, wage rates, quantity of materi-
als, prices of materials, factory overhead, engineering expense, tooling expense, general
and administrative expense, and profit. In addition to determining his or her own
position for each major element of cost, the buyer and the negotiating team
members must estimate the objective, maximum, and minimum positions of
the seller. Determining the seller's maximum position is easy; it is the offer
made in the seller's proposal.
In addition to costs, specific objectives should be established for all items to
be discussed during the negotiation, including:
All technical aspects of the purchase
Types of materials and substitutes
Buyer-furnished material and equipment
The mode of transportation
Warranty terms and conditions
Payment terms (including discount provisions)
Liability for claims and damage
EO.B. point
General terms and conditions
Other objectives may include:
Progress reports
Production control plans
Escalation!de-escalation provisions
Incentive arrangements
Patents and infringement protection
Packaging
Title to special tools and eqUipment
Disposition of damaged goods and off-spec materials
The Dynamics of Negotiation
Typically, the two parties' positions appear as shown in Figure 17-1. The
seller's positions are generally all higher than the corresponding positions of
t h ~ buyer. The closer the two objectives are initially, the easier the negotiations.
.\s negotiations proceed, the seller tends to make concessions from its maxi-
368 PART 3: SOURCING
. Minimum Objective Maximum
Buyer's position t--------
Seller's position
Minimum Objective
Cost ~
Maximum
_ "Essence" or "heart" of negotiation
FIGURE 17-1
Negotiating positions.
mum position toward its objective. Simultaneously, the buying firm's negotia-
tors reduce their demands, moving from the minimum position toward the
objective.
1
Usually, little difficulty arises during this preliminary skirmish. This
is not to say that this part of the negotiation process is easy or that it does not
take time. Normally, vigorous testing is required to convince each party that
the other is actually at his or her objective. Each party attempts to convince the
other that the objective has been reached before this has, in fact, occurred.
As each party approaches its objective, negotiation becomes difficult. The
distance between the buyer's objective and the supplier's objective can well be
called the "essence" 01" "heart" of the negotiation. (See Figure 17-1.) Any con-
cession made by either party from its objective position will appear unreason-
able to him or her based on the previous analysis of the facts. Changes in posi-
tion, therefore, must now be the result of either logical persuasion and
negotiating skills (entailing further investigation, analysis, and reassessment
of the facts) or the pressure of brute economic strength.
It is in the area of objective persuasion that the skillful negotiator stands
out. He or she makes progress by uncovering new facts and additional areas
of negotiation that permit the supplier to reduce its demands. For example, an
analysis of the supplier's manufacturing operations might reveal that if lead
time were increased by only one week, the job could be done with fewer
machines making longer production runs. This change could substantially
reduce the supplier's setup and scheduling costs, thus permitting a price
reduction. Additional lead time might be made available by a slight
modification in the buyer's production schedule. The cost of making this
Ilf the negotiator believes there is a possibility of actually achieving the minimum position, he
or she should open with a position below this point-provided such a position call be logically SIII'-
ported.
CHAPTER 17: NEGOTlATlON 369
change could well be much less than the seller's savings from the longer
duction runs. Thus both parties would profit from the change. It is this type of
situation that competent negotiators constantly seek to discover and exploit in
their attempt to dose the gap between the seller's objective and their own.
Such situations have the highly desirable effect of benefiting each party at no
expense to the other party.
In some sole-source the seller's objective is to maximize its
position at the expense of the buyer. In these situations. a continuing relation-
ship is of secondary interest to the seller; therefore. it uses its bargaining
strength to maximize price, rather than to achieve a mutually advantageous
contract that will lead to continued business. The buyer who senses such a sit-
uation should start negotiations by attadring the reasonableness of the sel1er"s
cost breakdown, using his or her own prepared cost estimates as the basis for
such contentions. In the absence of competition, this is a most logical
and most effective plan of action. U the supplier refuses to divulge its cost
the negotiator has only three available courses of action. He or she can
appeal to the seller's sense of reason, pointing out the potential negative long-
r.m implications of such actions; a second approach is to fight force with force
by threatening to use substitutes, or to redesign and manufacture the product;
and a third alternative is to further develop and refine the firm's cost estimat-
ing models and utilize them more forcefully in pursuing the original course of
negotiating action.
When faced with this type of problem, the negotiator must attempt to bring
the supplier's price as close to the objective as possible. In the short run, the
buyer usually pays the seller's price. In the long run, the buyer works toward
the development of competing sources, substitute products, and compromises
with the supplier.
If a seller's negotiation objective is to resolve issues as quickly as possible,
employing logical analysis rather than economic bargaining power, it is some-
times reasonable for the buyer to start negotiations by proposing his or her
actual objective as the counteroffer to the seller's proposal. In fact, in industrial
situations where continuing relationships are the rule, each successive negoti-
ation brings the objectives of both parties ever closer together. Under these
buyers and sellers need develop only their objective positions;
there is no need for maximum and minimum positions.
The Four Phases of Face-to-Face Negotiations
F.ct Finding During the initial rnming with the potential supplier, the
professional negotiator and the negotiating team limit discussions to fact
finding. Any inconsistencies between the supplier'S proposal and the buyer's
information are investigated.. Fact finding should continue until the negotiator
has a complete understanding of the supplier's proposal Questions of a how,
370 PART 3: SOURCING
what, when, who, and why nature are used by the negotiator. Experience has
shown that when the negotiator limits this initial meeting to fact finding, a sat-
isfactory agreement normally results with a minimum of hassle and disagree-
ment. During the fact-finding process, the negotiator should gain a better
understanding of both the supplier's interests and the supplier's strengths and
weaknesses. The buying and selling representatives should disclose their
interests-not their positions. Altogether too much time is wasted in haggling
over positions. Professional negotiators quickly learn their opposite's
not their positions. It is much easier to satisfy interests than it is to move one's
opposites off their positions. On completion of the fact-finding process, the negotia-
tor should call for a recess.
The Recess During the recess, the negotiating team should reassess its rei
ative strengths and weaknesses, as well as those of the supplier. It may also
want to review and refine its cost estimate. The team then should review and
revise its objectives and their acceptable ranges. Next, the team should orga-
nize the agenda it desires to pursue when the two teams return to the
ating table.
All negotiations center on specific issues. One of the difficult tasks of nega.-
tiation is to define fully the important issues which are to be included on the
agenda and then to be sure that the discussion is confined to these issues. Most
authorities believe that the issues should be discussed in the order of their
probable ease of solution. With this priority system, an atmosphere of cooper-
ation can develop that may facilitate solving the more difficult issues.
Narrowing the Differences When the formal negotiations reconvene, the
negotiator defines each issue, states the facts (and any underlying assump-
tions), and attempts to convince the supplier's representative(s) that the nego-
tiator's position is reasonable. If agreement cannot be reached on an issue, the
negotiator moves on to the next issue. Frequently, discussions on a subsequent
issue will unblock an earlier deadlock.
During this phase of the negotiating process, problem solving and compromise
are used to find creative solutions where both parties win. The buying team's
manufacturing engineers may identify a more cost-effective process than the
supplier had planned to use. Small acceptable changes in packaging, schedule,
or tolerances; offers by the customer to furnish a material or an item of
ment; and payment terms (including possible advance payments) can unblock
negotiations to the benefit of both parties.
In most instances, it is possible to reach a satisfactory agreement through the
use of these procedures. If a satisfactory agreement cannot be reached, the nego-
tiating team has the choice of adjourning (an attractive alternative for the buyer
if another supplier is waiting in the wings) or moving on to hard bargaining.
Hard Bargaining Hard bargaining, the last resort, involves the use of
take-it-orleave-it tactics. lts use is limited to one-time or adversarial situations
CHAPTER 17 NEGOTlATION 371
where long-term collaborative relationships are not an objective. The negotiat-
ing team should arefully and professionally review and revise its objectives
and, if absolutely necessary, give the supplier the option of accepting or reject-
ing its final proposal The experienced negotiator does not bluff unless willing
to have the bluff called. Unless a one-time purchase of an item already pro-
duced (e.g., an automobile on a dealer's lot) is involved, the wise negotiator
avoids having the seller feel that it has been abused or treated unfairly. Such
feelings set the stage for future confrontations, arguments, unsatisfactory per-
formance, and possible daims.
TECHNIOUES
Negotiation techniques (tactics) are the negotiator's working tools. The neg0-
tiator uses them to achieve his or her strategic goals. In the hands of a skillful
negotiator, these tools are powerful weapons. 10 the hands of a novice, they
can be dangerous booby traps. Competent negotiators, therefore, spend a great
deal of time studying and perfecting the use of these techniques. There are so
many negotiating techniques that ali cannot be discussed here. Those selected
for discussion adequately represent the techniques that have proved to be
most important and most effective.
The objective of negotiation is agreement. Even though agreement is the
fundamental goal of negotiation, negotiations occasionally end without agree-
ment. In the short run, reaching no agreement is sometimes better than reach-
ing an unsatisfactory agreement. Generally speaking, however, experienced
negotiators seldom let negotiations break down completely. They do not inten-
tionally maneuver or let their opponents maneuver themselves into take-it-or-
leave-it or walkout situations unless they are involved in a one-time or adver-
sarial relationship.
NegOtiating techniques may be divided into three categories: (1) those that
are universally applicable, (2) those that are applicable to traditional (and, fre-
quently, adversarial dealings), and (3) those that are applicable to collaborative
refatio"ships.
Universally Applicable Techniques
These are techniques which are applicable to aU negotiations, whether arm's
length or collaborative ones.
"Murder Boards and Mock egOtiilltiOIU Experienced negotiators fre-
quently finalize their preparation through the use of "murder boards" and
mock negotiations.
A murder board consists of senior purchasing and supply management,
finance, manufacturing. quality, engineering. and general management per-
sonnel The negotiating team presents its agenda, objectives, and tactics for the
forthcoming negotiations. Members of the murder board dissect the negotiat-
Ing plan in an effort to identify a\'oidable problems.