Negotiations are an important business instrument that helps companies make good deals, thus increasing profits and extending the scope of their activities. Negotiating is a skill that can be learned, so procurement specialists should be trained to do their best at the bargaining table. This training guide will explore the elements, tactics, key team members, and pitfalls of supplier negotiations, as well as their impact on financial results.
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Elements of Business Negotiations
There are seven key elements of negotiations, which define whether they will be successful. The first of them is interests, meaning needs and wants to underlie the positions of negotiators (Shonk). The second element is legitimacy, which means that stakeholders should treat each other fairly and not take advantage of the opponent (Shonk). Frequently, negotiations are not just a single transaction; therefore, good relationships between negotiating parties are crucial, which is the third element (Shonk). The fourth component is the best alternatives to a negotiated agreement (BATNA), that is, the actions that stakeholders will take if there is no deal (Shonk). The fifth element is options, meaning all possible choices that parties can make to satisfy their needs (Shonk). Commitments are offers or promises that stakeholders give each other (Shonk). The final component is communication that refers to the way people negotiate, for example, in person or via e-mails, and their choice of words and behaviors (Shonk). To make a good deal, stakeholders should consider all these key constituents of negotiations.
Purchasing Negotiation Tactics
Negotiators use specific tactics to achieve the best possible outcomes. Sometimes, they prefer to use win-lose tactics, in which one party benefits while another feels being taken advantage of (The World Bank 21). Such methods are considered unethical, so negotiators should ensure that both parties benefit at the end of debates (The World Bank 21). One of the possible tactics is ‘straw issues,’ meaning that one party demands something not very important to be able to concede this demand for the sake of a truly significant matter (The World Bank 21). Another method is a ‘broken record’ that means that a negotiator refuses to see the variety of available options and sticks to a single solution; such negotiators are considered difficult to deal with (The World Bank 21). Saying no is another useful tactic that may seem easy to implement (The World Bank 22). However, those who want to be supportive may find it difficult.
Importance of Supplier Relationship Management
The significance of relationships between buyers and suppliers in negotiations may be illustrated by a dispute between Volkswagen and its supplier, Car Trim. In 2916, VW decided to cut costs by canceling a number of agreements with its suppliers, “including a €500 million order for special parts from Car Trim” (Rogers and Fells 121). As a result, Car Trim stopped delivering components to VW (Rogers and Fells 122). Although during the following negotiations, compensation terms and protective rules were established between the companies, VW lost more than €100 million due to the dispute, and the relationships with its supplier remained strained (Rogers and Fells 122). This example illustrates that relationships with the supplier not only affect the outcome of ongoing negotiations but also influence the already reached agreements. Therefore, procurement specialists should make sure that their decisions do not have adverse effects on the relationships with important suppliers.
Examples of Successful Negotiations
One example of successful negotiations is the deal between AT&T and Time Warner. CEOs of the two companies met to discuss changes in their industry, and the outcome of the negotiation was a vertical merger (Nasher). Time Warner became responsible for creating content, and AT&T was in charge of distributing it among its numerous customers (Nasher). Antitrust regulators’ attempts to block the deal appeared to be unsuccessful, and Time Warner, which became a division of AT&T under the name WarnerMedia, became a large world-famous entertainment company (Nasher). The negotiations between Fox and Disney also were successful and resulted in a horizontal merger (Nasher). Disney initially offered to buy Fox at $53.4 billion; however, when Comcast offered $65 billion, Disney raised the offer to $71.3 billion (Nasher). The mentioned examples of negotiations led to a good bargain for both parties.
Pitfalls of Supplier Negotiations
Negotiations are a challenging process, and there are always risks that something may go wrong. One of the pitfalls of procurement negotiations is powerful suppliers, whose influence in the industry is greater than that of the buyer (Wen). If a small company has only one large supplier, it can improve its disadvantageous position by maximizing the value of an agreement for both sides (Wen). Furthermore, negotiations are often time-limited, and time pressure can cause stakeholders to make bad decisions or choose the wrong strategies (Wen). Wen argues that “80 percent of the concessions occur in the last 20 percent of the time available” (para. 6). It means that people tend to be more flexible when the deadline is coming. Thus, negotiators should always know their bottom line and not let time pressure force them to make disadvantageous concessions.
Key Members of Negotiation Teams
If negotiation is going to be complicated or has a great significance for a company, it is better to develop a negotiation team. Its most important member is a leader whose task is to inform other members of the negotiation goals and strategy (The World Bank 18). He is also responsible for making decisions, so he should have the authority necessary to make agreements (The World Bank 18). Another key member is a critic who searches for flaws in the work of his negotiation team or in the offers made by the opponent (The World Bank 19). A relater in a team is necessary to build relationships with the opposing party, which may let him find out some useful information about it (The World Bank 19). A negotiation team should include an expert who will clarify technical aspects of the subject of negotiations (The World Bank 19). These roles are essential for a team involved in a complex negotiation.
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The Impact on Financial Results
Procurement negotiations serve as a way for buyers and suppliers to agree on the terms of their supply agreement. Today, the aim of the negotiations goes far beyond getting the lowest price (Red Bear Negotiation Co. [RBN] 3). Successful supplier negotiations help companies to reduce their overall costs and increase profits (RBN 3). Furthermore, the collaboration between suppliers and buyers during negotiations may reveal inefficient processes that cause unreasonably high prices and costs (RBN 10). Thus, successful procurement negotiations lead to improved financial results and help to build productive relationships between buyers and suppliers.
To sum up, supplier negotiations are aimed at delivering benefits to both negotiating parties. Building relationships between buyers and suppliers is significant both for the outcomes of negotiations and for agreements reached during debates. Therefore, negotiators should apply tactics that will maximize the value for both parties. It is possible if one party pursues its interests but does not take advantage of the opposing party.
Nasher, Jack. “Top 10 World Changing Negotiations of 2018.” Forbes. 2018, Web.
Red Bear Negotiation Co. Supplier Negotiations: An Opportunity to Improve Profits. 2018, Web.
Rogers, Helen, and Ray Fells. “Successful Buyer-Supplier Relationships: The Role of Negotiations.” Journal of Strategic Contracting and Negotiation, vol. 3, no. 3, 2017, pp. 121-136.
Shonk, Katie. “What is Negotiation?” Program on Negotiation. 2019, Web.
Wen, Tang Wei. “Key Challenges for Effective Procurement Negotiation.” SIPMM. 2018, Web.
The World Bank. Negotiations and Best and Final Offer (BAFO). 2018, Web.