Retooling Negotiations Skills for a Supply Management Environment
Brian G. Long, Ph.D., C.P.M.
Brian G. Long, Ph.D., C.P.M., President, Marketing and Management Institute, Inc., Kalamazoo, MI 49002, 616/323-1531
81st Annual International Conference Proceedings - 1996 - Chicago, IL
In the new age of JIT, strategic alliances, single sourcing, and supply chain management, many old methods of purchasing negotiations are no longer viable. This presentation will focus on the new kinds of negotiation skills necessary to implement the modern purchasing practices that are now mandated by new evolutions in the purchasing profession.
More changes may have taken place in the purchasing profession in the last ten years than occurred in the previous fifty. Management's enlightened understanding of purchasing's role in the organization has put purchasers under more pressure to show "bottom line" results, but at the same time lower inventories, elevate quality, and improve services by negotiating what seemed like impossible agreements just a few years ago.
Unfortunately, the same firms that champion all of these contemporary purchasing practices have not updated their people and their negotiation skills to match. This presentation will therefore focus on the new skills which purchasers must acquire in order to make all of these things happen as they should. Particular attention will be devoted to negotiating with the entire supply chain rather than just with a salesperson sitting in a purchasing office.
Traditional Purchasing. Thirty years ago, the job of purchasing was very different. The typical purchasing manager was thought to be a gatekeeper, guardian of the treasury, and funnel through which every expenditure for the purchase of goods and services should pass. Because of the large dollars they were often spending, they had the power to demand compliance from suppliers. A sign hung on the wall in one purchasing office read, "HAVE YOU KICKED A VENDOR YET TODAY?"
In the world of crowded file cabinets, mountains of catalogs, and vaults filled with archived purchase records, the purchasing manager was the person who "knew where to go to buy things," which often resulted in the requisitioner being more than willing to simply file requisitions and wait for fulfillment. Little attention was paid to the fact that the cost of transactions for both buyers and sellers were rising rapidly. It has taken until the 1990s for many firms to realize that these rising costs now mean that purchasing is no longer adding value to well over half the transactions passing through the average purchasing office.
Traditional Negotiation Training. For more than fifty years, purchasers let the sellers set the negotiation agenda. To these traditional sellers, negotiation was a game. The seller would begin by offering to sell for a very high price, and the buyer would counteroffer with a very low price. Then the games began. Both buyers and seller would try to trick each other into an agreement. At least half the discussion was something less than honest. Tricks and lies were thought to just be part of the "game." Furthermore, to these negotiators, "a lie was not a lie when the truth was not expected." Therefore, traditional negotiation training taught both buyers and sellers to (1) use tactics and tricks, (2) creatively lie, and (3) artfully badger the other party. Purchasing negotiation was viewed by both buyers and sellers as well as others in the organization as simply beating down the seller's price -- sometimes at the expense of delivery, quality, and goodwill.
Purchasing's New Role. The current purchasing literature is filled with strategies and buzzwords that didn't exist thirty years ago. Such concepts as partnering, strategic alliances, JIT, supplier certification, supplier consolidation, and at least a half dozen other terms demand a new approach to negotiation. The absurd thought of "playing games" with a JIT supplier speaks to the fact that traditional negotiation systems have little or no place when implementing modern purchasing practices.
The Supply Management Environment. Many strategists believe that purchasing is evolving into supply chain management, which implies a much broader horizon of responsibility as well as multiple levels of negotiations. Instead of in-baskets filled with seemingly endless stacks of requisitions, the majority of a purchasing professional's work will be that of administering a series of large contracts for complete commodity groups. In terms of negotiation, the focus will shift from relatively small, day-to-day purchases to large, multi-year contracts. Negotiation skills therefore must focus in two directions. First, the task of negotiating multiproduct, long term supply management agreements. Second, the day-to-day task of bridging the gap between the end users and working with the suppliers to iron out difficulties, revise systems, monitor controls, and otherwise maintain proper performance. At least ten new skills will be necessary to retool the purchasing professional to meet this challenge:
1. People Skills. In the old school, purchasers were taught that being overly friendly could be regarded as a sign of weakness. Being a little mean and nasty on occasion would therefore let the seller know who was boss and command their respect. As the old school gives way, people skill now appears to be one of those areas where the purchasers may be highly undertrained-- or even mistrained.
In today's environment, there is often more money to be saved negotiating inside the organization than outside. Building relationships inside the firm is just as important to the purchasing profession of the future as building external relationships. Altogether too many purchasers and their jobs are protected by company procedures demanding that all requisitions of a certain size must go through the purchasing department. In the age of "empowered" department managers, this may not be the case in the future.
Finally, the nature of the buyer/seller relationship is being redefined. All the buyer needed in the past was to have a good relationship with the salesperson. In todays' environment, as well as the supply management environment of the future, the buyer's relationship will be with the supplier's entire organization.
2. Team Skills. Too many people in all phases and at all levels in many firms went trough team building seminars in the late 1980's and early 1990's with their fingers crossed behind their backs. In private, they said, "Teams are a great idea, but they won't work at our company." Needless to say, many firms will find it necessary to revisit the concept of team building in order to create the intra-organizational effort necessary to make supply management agreements work as they should.
In other instances, team building is necessary to get purchasing back on the team. Some firms that were successful in team building created teams that did not include the purchasing function. At least some purchasers have lamented in retrospect that they did not adequately assert themselves regarding the importance of including purchasing on the team.
3. Cost Analysis. Old school purchasers were often taught to badger for a lower price with little or no knowledge of what the actual price ought to be. Old school sellers dreamed of opportunities to close particular sales at outlandishly high prices and earn large commissions.
In the supply management environment, most pricing will be based on some form of cost-plus pricing. Pricing according to market demand, regardless of whether the current market favors the buyer or seller, will be obsolete for most commodities. Sellers of the future will be asked to submit cost data for scrutinization, and will guarantee certain margins, and be rewarded for cost reductions. Purchasers will work with sellers to take unnecessary costs out of the system resulting in price reductions.
However, altogether too many purchasers of today are not cost accounting literate. When asked to define the basic differences between job order and process cost accounting, they come up short. This level of illiteracy must be bridged for the purchaser of the future.
Finally, there is the elusive concept of calculating total cost. It sounds easy, but actually negotiating on the basis of total cost requires a whole new perspective and set of skills.
4. Target Pricing. One purchaser proudly declared, "Target pricing? I've been using it for years. I pick a price and tell the seller to meet it or forget it." Sadly, many people today think that target pricing is really just some form of take-it-or-leave it negotiations. In actuality, target pricing involves a detailed analysis of all factors which contribute to price, including materials, services, expertise, inventory, and almost every other imaginable business expense. For obvious reasons, it has worked well for firms who attempt to outsource products they are already manufacturing. In the future, this tool will be used for other procurements as well, especially in the service arena.
5. Computer Literacy. No serious observer disputes the notion that the computer will be the purchaser's most important hardware tool of the future. Almost every purchaser praises the importance of the computer and points to the efficiencies of computerized purchasing over manual systems. However, only a fraction of the professional purchasers of today can run even one of the standard spread sheet pro-grams. With management's focus on bottom line results, purchasers too often show up at staff meetings without the necessary data to support their positions.
Even many large firms of today admit that they are far behind in their computer training for their purchasing staffs. Many purchasers will find themselves to be at a definite disadvantage in many negotiations if they cannot assemble and organize the charts, spread sheets, and other information necessary to conduct a detailed negotiation.
6. Master of Commodity Information. In the past, purchasers gleaned clout from being "the" person who knew where to go to find things. With supply management agreements in place for many commodities, this task is shifting to the seller. In the supply management environment, purchasers of the future will have to become the people with the latest and best information about their respective commodities. An old school solution to the problem of adequate market information was to rely on sellers to provide updates on the market. Is this the fox watching the chicken coop? Not necessarily. But the fact remains that the seller is not always the best source for this kind of information.
Where will purchasers look for commodity information? Several places. First, most news organizations, periodicals, newspapers, 10-Ks, press releases, opinions, rumors, and every other form of human communication will probably be available on the Internet within the next ten years. To the non-purchasing professional, this information overload will be overwhelming. However, a new breed of skilled purchasers will sort out, classify, and clarify this information into a powerful managerial tool. Like other phases of the purchasing process, this process sounds easy, but it is not.
A second source of purchasing information comes for trade periodicals that are often on the purchaser's desk but unread. In the age when everyone is being asked to do more with less, altogether too many purchasers go from month to month without adequately digesting the latest information at their fingertips.
Not all of this new-found information will come from either the printed or electronic media. For instance, the purchaser of the future should attend about three trade shows per year for the purpose of updating the firm's information on leading edge technologies and potential new sources.
7. Commodity Training. The salesperson for an automotive door latch manufacturer lamented a recent sales call. A new buyer had just been reassigned to purchasing door latches without even a moment's training about the technical aspects, DOT regulations, or quality issues associated with automotive door latches. Five minutes into the conversation, the salesperson concluded that the buyer didn't really know, "... a door latch from a throttle plate." He further noted that it was probably going to take him several months to teach the purchaser everything that he needed to know about door latches. In the meantime, the purchasers had already concluded their first meeting by badgering for a lower price.
In the supply management environment of the future, commodity training will be essential. Sellers will simply not put up with purchasers with whom they cannot carry on an intelligent conversation about the commodity. Conversely, technically trained requisitioners may become just as frustrated. Months of training are often required before sellers are even allowed to make their first sales call. In the future, similar requirements will be demanded of the purchasing professional. In absence of this training, both requisitioners and sellers may conclude that the purchaser is not adding value to the transaction and may elect to exclude them from the entire process, except perhaps for processing some of the necessary paperwork.
8. Contract Writing. In today's environment, hundred of transactions are processed daily utilizing the standard purchase order form supported by the standard terms and conditions preprinted on the back. Many of today's purchasers are not even aware of the meaning of all of these T's and C's, let alone their impact.
In the supply management environment of the future, the purchase order will be utilized for spot purchases only. The majority of the supply management agreements will utilize individually negotiated terms and conditions to fit the nature of the commodity and the individual needs of both the buyer and seller. An effective negotiator will therefore need to be trained in the skills necessary to write the contract terms necessary for each major contract. Altogether too many of today's supply management agreements contain terms that were actually prepared by the sellers themselves.
9. Macro-Supplier Cost Management. A lot of the top retail firms of today owe their success to a few fairly simple purchasing philosophies. First, they don't listen to sob stories about how costs have gone up and price increases are necessary. They simply ignore these price requests, and if necessary, buy elsewhere. Second, they believe the world is the marketplace, and they insist on world competitive pricing, recognizing the MADE IN U.S.A. doesn't count for much in the marketplace, whether any of us like it or not. Third, they expect the seller to unconditionally stand behind the product in terms of service and 100% refunds. Finally, they expect the sellers to work with them on cost reduction, marketing, inventory reduction, and a whole host of other things.
Although this sounds relatively harsh for an environment of cooperation and strategic alliances, it is a reality that the purpose of supply management is not just to shift costs around but also to reduce them based on a total cost environment. This will be a key challenge to negotiations of the future.
10. Management of Suppliers. Old school purchasers registered disgust with a seller by simply placing the business elsewhere. Future purchasers will become management consultants to the supplier base, and help them with any phase of their business operation. When negotiating large contracts and demanding better pricing, quality, and services based on large volume, purchasers will also earn the right to criticize and manage certain aspects of the seller's business. During the life of the agreement, the focus of the negotiations will then shift to individual negotiations with the seller's personnel in order to bring them up to speed. This by itself will require a whole new set of skills on the part of the purchaser.