Notesale: Turn your study into money

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Getting & understanding the facts
Being prepared is essential for success!!!
Being prepared means:

Understanding your needs & requirements
Knowing the supply market conditions
Knowing your purchasing strategy
Knowing your desired supplier relationship
Being aware of prices & costs
Understanding the supplier company
Understanding the people involved
Assessing the balance of power
Carrying out a SWOT analysis

ITC

M7:U2:2
...
2-1

The supply market conditions
Overall supply conditions
Technological developments & substitutes
Price trends
Major cost elements
Market structure & degree of competition
Different supply market segments
Government policies & regulations…

ITC

Supply Market

M7:U2:2
...
2-1

Supply market analysis
Link each statement on the left-hand column to the one that best corresponds on the
right-hand side, by drawing a line between them
...
2-3

Your P&S Strategy
will depend on:
Level of annual expenditure on the item
Supply impact, opportunity and risk
The Supply Positioning Model can help you to:
 Prioritise the efforts you invest in
negotiating with suppliers
 Determine the focus of your negotiations

ITC

M7:U2:2
...
2-5

Action Point

2
...
Describe your approach, outline major
differences with the approaches described in the Coursebook, indicate any
changes you would think advisable for your own approach
...
2-6

The supplier-buyer relationship continuum
and its effect on negotiations

Spot
purchase

Regular
trading

Call-off
contracts

Fixed
contracts

Partnership

Joint
ventures

 Trust based only on contract  Trust based on contract and on  Trust based on goodwill and
supplier’s competence
co-operation
 No personal relationship
 Limited personal relationship  Strong personal relationship
 Strong use of tactics and
 Strong use of bargaining
 Strong emphasis on mutual
ploys
gains
 Price orientated
 Price and service orientated
 Total cost of ownership
orientated
 Short term
 Medium term
 Supplier performance
measured on the basis of
non-compliance

ITC

 Supplier performance measured  Long term
on the basis of non-compliance
and through supplier evaluation  Buyer and supplier
organisations measure each
other’s performance and
jointly develop remedial
actions
M7:U2:2
...
3-1

Action Point

2
...
For which type of purchases was this pricing
method used, and which market factors do you think led the supplier
to adopt this strategy?

ITC

M7:U2:2
...
items produced
ITC

M7:U2:2
...


Quantity (Q):

100

500

1,000

B
...
50

The total amount to
be paid for each
C
...


Differences in Q x P (C):

E
...


Estimated variable cost
per unit (D/E):

-

$ 4,500

$ 3,500
400

$ 8
...
3-4

Analysing the supplier’s price (Cont’d)
The lowest total
variable cost for
each production
run:
The supplier’s
lowest likely
cost per run:

G
...
Total variable cost for each
production run (A x G):

$6

$6

$6

$ 600

$ 3,000

$ 6,000

I
...


Total cost (H + I):

$ 1,000 $ 3,400 $ 6,400

Estimated potential for negotiating savings through price
reduction:

ITC

Potential savings (C – J):

-

$ 1,100

$ 1,100

Percentage of original
amount:

-

24%

15%

M7:U2:2
...
3-2

Analysing the supplier’s price

You are preparing for negotiations
...
Undertake a price analysis to estimate the
total cost of the supplier and the potential savings for the quoted quantities
...
3-6

Action Point

2
...
3-6a

Building a cost model
Supplier A
7%

Supplier B

18%

10%

15%
15%

25%

50%

Labour

ITC

Overheads

60%

Materials

Profit

M7:U2:2
...
3-3

Developing a cost model

Your company would like to record on videotape an important event- the launching
of a new product
...
Your company has just received a quotation from a local supplier for
renting a video camera with an operator for one full day
...
For this, identify the cost elements and try to budget them so as to
arrive at an overall picture of the cost structure for this service
...
3-8

Obtaining market information
on prices & costs
Quotations
Reference prices
Prices of raw materials
Trend analysis
Independent estimates by experts
Business contacts
ITC

M7:U2:2
...
4-1

Action Point

2
...
4-2

Action Point

2
...
4-3

The Supplier Perception Model

-how suppliers see your company as a potential client
High

Level of
attractiveness

Low

ITC

Develop

Core

Marginal

Exploit

Value of
business

High

M7:U2:2
...
4-3

Supplier’s perceptions of the buyer
A supplier makes the following four different quotes for the same
product to four different buyers:
$ 25 to Buyer A

$ 15 to Buyer B

$ 10 to Buyer C

$ 8 to Buyer D

The supplier’s fixed cost per unit is $7 and its variable cost is $2
...
4-5

Action Point

2
...

Factors that motivate them:
Factors that do not motivate them:
In which category of the supplier’s perception do you think your
enterprise falls?
High

Level of
attractiveness

Low
ITC

Develop

Core

Marginal

Exploit

Value of
business

High
M7:U2:2
...


ITC

M7:U2:2
...
5-1

Knowing the people

Think of an important negotiation you have been involved in
recently
...
5-2

Action Point

2
...

1 - if you sometimes behave as described
...


1
...

6
...

16
...

ITC

2
...

12
...

22
...

8
...

18
...


21
...


4
...

14
...

24
...

10
...

20
...

M7:U2:2
...
5-2 (Cont’d)

20
15

AA A

A

10
20

Dealmaker

15

10

5

Tough

5
10

5

15

20

5

15
20

Creative
ITC

s
dwarf
seven

10

the
e and
Whit
Snow

10

5

15
20

Logical

M7:U2:2
...
5-5

Warm
Strengths


ITC

Friendly and
accessible

Weaknesses

Suggestions on how to deal
with them



Too accommodating



Build trust



Can lose sight of the
essentials



Use logic that
shows understanding



Good listener



Shows
concern and
empathy



Finds it difficult to deal
with conflict and
pressure



Emphasise the
importance of the deal
to them as individuals



Looks for
mutual gain



Discloses information
easily





Patient





Trusting

May focus too much on
personal issues

Summarise frequently
and keep the discussion
focused



Emphasise the long-term
relationship



Values
personal
relationships



Ask open questions to
determine their needs
and concerns



Finds it difficult to deal
with people who do not
value personal
relationships

M7:U2:2
...
5-7

s
dwarf
seven
the
e and
Whit
Snow

Logical
Strengths


Focuses on
the issues



Tries to “force” logic on
others



Grasps
details



Unimaginative - relies
too much on facts and
figures



Precise



Methodical



Well-prepared



Backs up
statements
with facts,
figures and
reasoning



ITC

Weaknesses

Keeps good
records

Suggestions on how to deal
with them


Do not allow yourself to
get caught into their logic
stranglehold



Get their list of
requirements at the start



Tends to ignore the
people involved



Listen, and evaluate their
facts carefully



Gets too absorbed in
the details



Recess often to analyse
the issues



Cannot readily change
persuasion styles



Show respect for their
expertise



May not see the global
picture





Reaches deadlock
easily

Back up your own
arguments with facts and
figures



Use emotion as a
counter-persuasion
M7:U2:2
...
5-9

Deal-Maker

AA A

A

Strengths

Suggestions on how to deal
with them



Sees
opportunities



Tends to neglect longterm goals



Try to understand their
underlying interests



Makes quick
decisions



May neglect details





Shifts positions quickly
and easily

Summarise and test their
understanding frequently



Trade concessions



Do not move too easily



Separate facts from
assumptions



Make sure you understand
all the implications of the
deal before agreeing





ITC

Weaknesses

Builds
relationships
easily
Strong desire
to achieve



Dynamic



Flexible



Enjoys
bargaining



Tends to be superficial
in personal
relationships



May try to manipulate
people and situations



Can propose risky
solutions, which may
be difficult to implement

M7:U2:2
...
5-3

Understanding negotiating styles
Try to think of a situation where you have been negotiating with a
person who was a good example of one of the above styles
...
5-11

Positions & interests
Positions

Interests

Things you say you want

Underlying motivations

Demands

Needs and concerns

Things you say you will, or won’t, do

Fears and aspirations

Discover underlying interests by:
 putting yourself in their shoes
 asking why / why not?
ITC

M7:U2:2
...
Organisation power
Market power
Relative value power
Financial power
Reputation power
Time power
Reward power
The power of choice
ITC

M7:U2:2
...
Personal power
Type of
personal power
 Position power

Gained through…
 Level of authority

in organisation

 Expert power

 Expertise, in-depth

knowledge about
subject/ product/ issue
 Information

power
 Disruptive

power

 Charismatic

power
 Connection
ITC

power

 Detailed information

relating to the issue to
be negotiated

 Possibility to stop

or disrupt a negotiation

 Leadership skills

Relevance to the negotiation
 Make sure you are negotiating with

the decision-maker and that he/she
has the necessary authority to
negotiate and reach a decision
...
Make sure that
your team has the required expertise
...
Be sure to have

all the information needed before the
negotiation
...
If used by the other side,
do not let it intimidate you by
having a good backup option
...
6-2

Some common mistakes
Under-estimating your own power
Over-estimating your own power
Assuming that the other party knows (or doesn’t
know) your weaknesses, problems, deadlines…
Assuming that the other party is automatically in
a stronger position

ITC

M7:U2:2
...
6-1

Personal negotiation power
Think of different types of personal power that you may have come
across when negotiating
...
6-4

SWOT Analysis - an example
Ours: • We are their first client in a
new market
• Small but growing business

Ours:
• Relatively small purchase volume
• Lack of negotiation skills

Theirs: • Leader in their home market
• Deal in both raw materials &
finished products
• Better access to market
information
• Good technical support
capacity

• Lack of experience in our market

Theirs:

SW

• Excess capacity
• No product differentiation

OT

• Long term contract
- guaranteed supply
• They provide training to our
product design staff
• Possibility to buy back some
of our production
ITC

• They may force us into sole source
contract that restricts sourcing
elsewhere
• They may sell to our competitors too
• They may withdraw from our
market if not successful
• They may increase prices at the
end of the first contract
M7:U2:2
...
7-1

SWOTing away!
Look back at a negotiation, which you have been involved in with a
supplier - or at one that you are about to conduct - and try to apply
the SWOT analysis model to that particular negotiation
...
7-2



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