Two Recent Articles

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#1  "The Psychology of Negotiations"

Article will appear in the July/August publication of ISM eSide Supply Management

The “art of negotiation” is spoken by the non professional with awe and reverence.  For the consummate supply chain professional, the “science of negotiation” is a badge of honor which decorates their office and resume.  Neither depiction justly captures the core competencies needed to successfully master the negotiation process.  Perhaps a better characterization could be the “psychology of negotiations.”   It might be said that the activity called negotiation is a hybrid which requires a combination of both social/psychological skills along with technical/business skills.

The “psychology of negotiations” is best exemplified during the compromise and concession phase of the process.  I believe an area that is under-appreciated is the pace at which the negotiation proceeds.  I believe that developing one’s personalized negotiation pace is the next best practice. 

Consider for a moment that the professional already is knowledgeable about the:

•  concession, compromise and the ebb and flow of “give & take”

• negotiation plans and best practice templates

• commonly used  tactics like bluffing and good guy/bad guy

• importance (and power) of non verbal communication

• ESPN’s TV series “Texas Seven Card Hold ‘Em” and watches for “the tell” (when someone is tipping their hand)

Yet, given all this knowledge, when do you take the time to analyze your unique negotiation style?  What drives you to conquer your adversary sitting across the table?  What is your motivation?  Is the goal to win and have the other side lose?  Do you strive for win-win, but insist that your piece of the pie must be larger?  Are you encouraged by altruistic motives for your employer and customers or is the motivation more Maslow basic like keep your job?

In order to become an effective and skilled negotiator and to be perceived as such by others, let’s explore the psychology behind style and pace.

Assume you are going to procure a widget and will engage in multiple rounds of price negotiations.  The supplier is the incumbent whom you have chosen to single source the widget from.  You have historical pricing of $25.00.   Let’s assume all other cost of ownership elements have already been successfully agreed to.  The only item left to negotiate is price. Your “should cost analysis” and benchmarking (along with last price paid) point to a target price of $23.50 for the upcoming contract period.  The supplier has mentioned something about rising fuel costs and material increases.  They have shared with you that the next contract period should have the widget being sold for $26.50.  As with any negotiations, there will be price concessions. 

Following are the four most common categories for pacing and the psychology behind each:

The “Beginner” chooses a pacing profile that is based on compromise and focused on relationship.  This negotiator does the not want to offend the other party, does not want to be perceived as tough or unfair, and settles for an outcome that is not ideal.  A “beginner” is less predictable and chooses a pace that is reactive to their environment and that is based on emotional response.  The “beginner” worries about failure and loses sight of the price target.  This individual views the process as problematic and rushes their way to a less-than-desired outcome.

Beginning Negotiator

                        Round #1        Round #2        Round #3        Round #4        Round #5

Supplier           $26.50             $25.50             $25.25             $25.25             $25.25

Buyer              $23.50             $24.25             $24.25             $24.25             $25.25

The “Intermediate” choose a pacing profile that is more consistent and predictable.  Their focus is achieving their target price.  The “intermediate” is less emotionally committed or relationship oriented.  They understand the “big picture” and present a negotiation profile that is based on years of successful experiences and outcomes.

Intermediate Negotiator

                        Round #1        Round #2        Round #3        Round #4        Round #5

Supplier           $26.50             $26.50             $26.00             $26.00             $25.00

Buyer              $23.50             $23.50             $24.00             $24.00             $25.00

The “Advanced” negotiator is very prepared and has developed a negotiation plan that has been vetted with key stakeholders.  Their focus is on meeting/exceeding historical pricing to achieve cost savings and to reduce cost of goods sold.  They present an unwavering style and are not distracted by external factors like cost of fuel or increased component pricing.  They understand that the relationship is single source but that they do have options.

Advanced Negotiator

                        Round #1        Round #2        Round #3        Round #4        Round #5

Supplier           $26.50             $26.50             $26.50             $26.00             $24.50

Buyer              $23.50             $23.50             $23.50             $23.50             $24.50

The “Expert” not only realizes his/her pacing style and strengths, but anticipates those of the supplier.  The “expert” regards the process as exhilarating, much as an athlete feels before a big game.  They bring their “A” game:  have their negotiation plan prepared and vetted, and know their walk-away position.  They have researched the fuel issue and benchmarked the supplier’s bill of materials.  This professional has personally reviewed the internal should cost analysis and has researched other supplier options.  The “expert” is confident but not cocky.  Their ego has been checked at the door and they closely observe and anticipate the moves of the supplier.  The “expert” will achieve win-win with a principled approach and pacing to their negotiations.  Their “win” will exceed their internal goal and even management’s stretch goal.   They also know that the biggest bets always come at the end of the poker game. “Experts” don’t bluff and ensure that they always have a winning hand.

 Expert Negotiator

                        Round #1        Round #2        Round #3        Round #4        Round #5

Supplier           $26.50             $26.50             $26.50             $26.00             $22.50

Buyer              $22.00             $22.00             $22.00             $22.25             $22.50

Developing your pace to make concessions and compromise is a personal choice.  It is important for the negotiator to feel comfortable with whatever approach that they choose and to be able to “sell it” without giving the supplier any “tell” signs. 

Preparation, practice, patience are the three keys (3P’s) to successfully developing your personalized negotiation pace.  It is also helpful to take into consideration your personality style and to pick a pace that is comfortable for you.

Understanding the psychology of negotiations is the new best practice.

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#2 "Effective Sourcing & Supplier Management Techniques"

written for APICS Portland and published on their website

Supplier management is a critical activity within the overall procurement process.  The generally accepted Seven-Step Strategic Sourcing Methodology concludes with “manage supplier performance.”  Where this appears last on the list of the seven-steps, it is definitely first as the singular best determinant of acquisition successfulness.

1. Develop spend analysis
2. Determine business requirements
3. Conduct market analysis
4. Develop category strategy
5. Complete supplier evaluation
6. Select suppliers & negotiate agreements
7. Manage supplier performance

Two key contributors to effective supplier management are #4 categorization of the supply base and #5 supplier evaluations.  Let’s look at these first.

It does not have to be rocket science as to-how best categorize suppliers. The more specificity and analytics that are required, the more cumbersome it is to effectively manage the supply base. Trust me, I have worked for large companies (e.g. Apple, Intel, Disney) that have obligated a tremendous amount of resources trying to right-size the supply base, manage approved vendor lists and figure out detailed spend per commodity code.  Lots of ergs were spent, but it is not clear that a detailed scrub results in more effective supplier management.

It is my experience that supply base management is as much an art form as it is a science. It needs to be within the context of over-all spend and equate to the desired outcomes you want to achieve. Simply, I evangelize the 80 - 20 rule. You want to spend (no pun) 80% of available resources managing the performance of a small yet leveraged pool of suppliers. An example will best illustrate this point.

Presume the total annual negotiable spend is approximately $200M and that spend is predominantly indirect goods and services. Further, assume 2,000 suppliers received P.O.’s in the last 12 months. A tiered supply base matrix could then be:

       Tier    Type               Percentage          #         Criteria

1.  Strategic               0.5%                   10          Mission critical, spend > $5M, sole source    
2. Preferred               1.5%                   30         Operationally relevant spend > $200K
3. Just a Supplier       98.0%             1,980         Competitive bid < $200

The goal would be to drive as much spend with the Tier #1 & #2 suppliers. Best practice is approximately 50% for both.  In the example of MRO and indirect goods and services I believe a higher percent can be achievable and more ideal. Based on tier designation, you can then develop supplier management accountabilities.                                                                       

Tier                 Activity                                                           Frequency

1                      Business Review                                               2x / year

                        Supplier Scorecard                                            4x / year                   

                        Review of Financials                                         2x / year         

                        Review Business Continuity Plan                        2x / year

                        Governance Plan                                              Annual

2                      Business  Reviews                                             Annual                                     

                        Supplier Scorecard                                            Annual

                        Financials and Business Continuity Plan              Annual

3                      Exception based involvement

You can scale the accountabilities based on business need, spend profile and internal resource availability. Categories and weights should vary with product of service being delivered. It is a good practice to establish a minimum scorecard level of acceptance (e.g., 3.5 / 5.0). For example, if the supplier falls below 3.5, then they know they will be put on corrective action, etc.

Now what if the supplier you selected is unable or unwilling to perform and doesn’t meet their contractual obligations?  The question could be asked why a supplier would ever be unwilling to fulfill their obligations.  Well, it happens - and more often than you’d think: 

• A supplier intentionally under-bids their competition and hopes the buyer will approve a price increase once the contract is signed and performance begins

• A supplier unintentionally bids too low and is losing money which jeopardizes their solvency

• A supplier cuts their margins too close on their bid and resources are running at full capacity.  A more lucrative contract opportunity with a different customer comes along with means higher margins and increased profit.  So the supplier chooses to breach their existing contract and is willing to accept the consequences.  They are betting the buyer will be lenient and compassionate or it’s because they negotiated a great contract which cleverly limits their risk in the event of non performance.  Perhaps the supplier was even wily enough to negotiate mutual termination for convenience language into the contract.

Regardless of the scenario, what can you do when your supplier doesn’t perform?  Is it too late for techniques like scorecards, business reviews and mediation?  Unfortunately, the simple answer is “yes” and your saving grace can only be your original BATNA (Best Alternative To a Negotiated Agreement). The BATNA should have been developed when the original sourcing decision was made.  The BATNA signifies what your walk-away option(s) would be.  This could include selecting the second (runner-up) supplier in the bid process.  If  you find yourself needing to quickly replace a tier one that is also a mission critical and sole source, then your options are very limited and may only include developing in-house capability or negotiating an equity arrangement with the supplier.

Where it may be an acceptable practice to assume that one can’t possibly plan for every supply chain risk or supplier misfortune, it is the role of strategic sourcing to ensure 100% uninterrupted supply of contracted goods and services.  In addition to always ensuring a bullet proof BATNA, the strategic sourcing manager can also take contractual steps to mitigate risk.  These would include:

• Never negotiate bilateral termination for convenience.

• Never limit potential supplier damages to the value of the contract or purchase order.

• Always structure service contracts to be deliverable based thus leveraging UCC rights and remedies which include direct, indirect and consequential damages.

• Never allow a supplier to insert language that allows force majeure (Acts of God) to include union strikes, weather-related delays, pandemics, etc.   It is the responsibility of the supplier to anticipate unique interruptions and have disaster recovery and/or business continuity plans in place.

In conclusion, effective sourcing and supplier management must be critical core competencies for all supply chain professionals.  Regardless of your title and responsibilities, it is very important to understand the categorization of your suppliers and ensure effective supplier performance management occurs throughout all levels of the supply chain.