Purchasing and Negotiation Training

Author, Speaker, Inventor and Consultant, Max Jaffe, CPA, helps individuals keep more of the money they make

Editor’s note: Max Jaffe is a regular guest contributor to this blog.

Isn’t it counter-productive to charge someone a fee if they’ve overdrawn their account?  It makes a negative balance “more negative.” 

To investigate, I called some banks and asked what happens when a check is written for more than the balance.  Assuming you have no account tied to the checking account to cover the check, the bank will cover it for you, which will make your balance negative. Then they will charge you a fee for that service, making your hole deeper.  In all fairness, the bank is making your check good, so shouldn’t they be compensated?

Most banks and credit unions offer customers “overdraft protection,” which allows checks as well as ATM withdrawals to overdraw their bank account.  The fee for that service ranges from $10 to $38 for each overdraft, according to a study by the FDIC.

Of the banks the FDIC surveyed, 86% had overdraft protection and 75% of those banks automatically enrolled customers in the program.  The most common instances where fees were charged were either customers in the age range of 18 to 25 or low-income customers.  Per The Wall Street Journal in an article on March 26, 2009, a research and consulting firm, Moebs Services, banks and credit unions earned $36.7 billion in consumer overdraft revenue in 2008, which makes up about 75% of their income.

Max Jaffe CD set

Many times people don’t keep track of their charges in relation to their reconciled balance.  Most people don’t even reconcile their bank account; they simply look up their balance on line.  The danger with this practice is that there may be large or small checks that have not cleared the account.  So you think you have $1,235.89 in your checking account, only to find that immediately after you checked your balance on line, the check you wrote for $1,174.23 cleared your account, leaving you with a $61.66 balance.  So much for that $75.00 item you thought you could buy.

A compromise would be to allow people to opt out of the service, thereby “bouncing” checks when there isn’t ample money in the account.  That way they won’t be charged the fee for being overdrawn, as long as the bank doesn’t charge a fee for returning the check.  Another problem is when several checks are presented at once; banks will process the largest one first, thereby making each of all the small checks incur overdraft fees, thereby accruing more income to the bank.  If all the small checks were able to clear, and they are presented first, then the bank would only be able to earn one overdraft fee, the one for the large check when presented at the end of the stream, makes the account overdrawn.

Try this: ask your bank if your account has overdraft protection.  If it does, then make sure your account is reconciled, and then you’ll know if a check will overdraft your account.  If you don’t reconcile your account, it’s something you might want to try; after all, it allows you to see where you stand.  I suggest you create an intimate relationship with your bank account; when it’s reconciled regularly, it will let you know where you stand.  If you don’t follow my advice on reconciling your account, or suppose you’re simply not good at it (not everyone is,) then I suggest if you have overdraft protection on your account, first ask your bank what the procedure is if you write a hot check with no overdraft protection, and if there are no charges, you then ask your bank to remove the protection.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s Note: This is Part II of a three part installment on how sellers can better identify and serve the buyer’s interests.  Part I explored business from the buyer’s viewpoint.  Part III examines specifics of using TCO to sell ‘Best Value’.

Eliminate wasteful confrontation over ‘lowest price’ by instructing the buyer in the most fundamental of all purchasing concepts, the Total Cost of Ownership (TCO).  The TCO equals the sum of the costs of Quality, Service, Delivery, and Price.  The definition of Best Value is the lowest TCO, not the lowest price. 

TCO provides the foundation for the professional practice of purchasing.  The buyer’s negotiation plan, supplier qualification and evaluation systems, and performance measurements all built on it.  Expertise in TCO promotes Sales to the ideal status of information resource to the customer.

Price is not the same as Cost

Price is just one element of cost, and merely an initial cost.  Quality, Service, and Delivery can, and almost always do impact the TCO more significantly than does the Price.  Communicate in the buyer’s TCO language.  You would not dream of bursting into a presentation in medieval French to impress your Japanese customer, but have you ever launched into a “one-size-fits-all” sales techno-babble recitation?  Buyers have heard it all too many times.   From a psychological perspective, if we can speak their lingo, we not to be ahead of our competition, smarter, and more concerned with solving their problems.   

Once you have the attention, and perhaps the admiration of the buying crowd, prioritize the elements of Cost, from the customer’s angle.  All four elements of Cost have different weights.  For instance, an aerospace customer may rate Quality as the most important Cost element, while a high tech company may cite Service, and a distribution firm may select Delivery as its most important element. 

 Metrics  

online training in purchasing, negotiation, and sales

This hardest part, by no coincidence, is the heart of the process.  Help the buyer to identify objective metrics for measuring the impact of each Cost element. (See table in Part III for elaboration)  This requires purchasing process knowledge, not glib sales speak.  If the buyer has bought into the value of TCO, but does not know how to create a formal analysis, seize the moment!  What could be better than your active participation in establishing the buyer’s cost evaluation rating for the supplier? 

Recognize the two edges of this sword.  It may expose your weaknesses, but you will know where to improve – or, at least, which tactics to take in revising our sales strategy.  Correspondingly, this inquiry feathers our own nest too as we record, and later trot out, our market advantages in the customer’s most crucial Cost concerns such as JIT delivery for a distribution industry customer. 

In Part III, we’ll apply a simplified version of a TCO to help close the sale.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s Note: This is Part I of a three part installment on how sellers can better identify and serve the buyer’s interests.  In Part II, we’ll see how the Total Cost of Ownership (TCO) is used to sell ‘Best Value’.

The answer to “What Does the Buyer Want? is not short, simple or satisfying.  Fortunately, as noted in every Sales Training 101, every problem is merely an opportunity. 

How can Sales harvest this opportunity?  Teach the buyers about Purchasing.  Ironically, Sales is better equipped to do this by education and training than are their Purchasing counterparts.  To reach them in a meaningful fashion requires a change in philosophy and appreciation for the buyer’s view of the business world. 

The epic movie Patton provides a great lesson.  Gen. Patton is shown reading the book on battlefield tactics written by his German adversary, General Erwin Rommel, in preparation for the African campaign.  Upon vanquishing his foe, Patton exclaims in glee: “Rommel, you beautiful bastard, I read your book!”  We want to know about the purchasing mind for more peaceful, yet similar purposes.

George C.Scott portraying Gen. Patton

USA Today reported that the 15.5 million sales people constitute 12% of the US workforce.  By contrast, only about 500,000 people reported their professional as purchasing, a stunning 31 to 1 ratio! 

Another interesting statistic is that sales pros receive an average of 38 hours of formal training per year, or 10 hours more than their senior executives, according to Training magazine.  How much do buyers get?  Among the thousands surveyed, the training and education for buyers for an entire career is 25 hours, or less than sales pro gets in an average year. 

Given this information, a wiser approach may be to treat the buyer as an “under educated and trained victim” rather than a miserly brute.  Since the mission is to win the purchasing war, better to bring our instruments of business into tune with the buyer’s sheet of music.

Consider the widely used expression “Best Value”.  The definition of that term varies among buyers.  Consequently, the Best Value negotiation easily collapses into a fool’s game of “lowest price”.  This game requires two fools because both will lose.  The seller gets burned on the low price and the buyer scraps Quality, Service and Delivery in favor of Price.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

When negotiating an international purchase and sales contract, both parties need to pay careful attention to the terms of sale.  INCOterms, an international set of trade terms has been adopted by many countries and defines exactly the responsibilities and risks of both the buyer and seller including while the merchandise is in transit.

The first following chart summarizes the responsibilities of both the buyer (B) and seller (S) for each of the specified INCOTERMS.  

The second following second chart provides detailed information on the meaning and application of each term.

 For more information on fortign trade, see also Foreign Trade, An Overview and Foregn Trade, Caveat Emptor.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editors Note: This two part post specifies how to deploy specific tactics in alignment with your concession strategy.

A trap used by good negotiators on the unsuspecting amateur is to plant a low (actual) value concession and then demand that you reciprocate.  Beware that the other side also engages in perceived value concessions.  Be prepared to challenge some of those concessions, especially when facing sophisticated buyers

Timing

When is as important as how to make the concession.  Never concede first on a point of major importance to you.  If you do, that point will be seen as trivial since you gave it up so willingly.  Moreover, your offer will be read as weakness and trigger a barrage of other concession demands.  Do not offer concessions too early in the process.  Typically, the greatest movement toward settlement (sometimes called progress) occurs in the waning moments.  Time is always a crucial factor in negotiations and can dictate concession behavior.  If you plan your concessions, you’ll counteract this tendency to be controlled by time.

Converge on Zero

Make concessions in decreasing amounts.  If you give the buyer a $500 initial price cut, and then double it to a $1000 ‘final’ concession to close the deal, the buyer has just learned that it pays to wait and ask for another concession.  Instead, divide your total price concession into decreasing offers.  Begin with the largest, and proceed to incrementally smaller bids.  For instance, give up 40%, 30%, 20%, and a final 10% of your total concession and do so in that order.  The convergence on diminishing returns is apparent to the buyer.

Your concessions, like the overall negotiation, plan should be in writing.  Prioritize the list of concessions from most to least important to you, and estimate the perceived value to the buyer.  The discipline of listing and prioritizing will help to keep on the path through the smoke and flames of the negotiation process. 

"Shorten your sales cycle & increase your win rate through competitive excellence"

Editor’s note: Stu Schlackman is a regular guest contributor to this blog.

Preparation for any negotiation requires a thoughtful strategy if we are to achieve the desired outcome.  I refer to Robert Menard, author of You’re the Buyer-You Negotiate it!  He cites three points of a good negotiation plan.

The 3 Points

1. Where are you now? What is your advantage and what are your costs? ”
2. Where are you going? What is the outcome you expect from the negotiation? The rabbit in Alice in Wonderland, asks Alice where she wants to go? Alice replies, “I don’t know,” to which the rabbit responds, “Then any road will take you there.”
3. How are we going to get there? Tthis controls your negotiation strategy and sets the stage for the game of “Ping Pong”, known as demand and concession in negotiation terms.

An integral part of negotiation is the determination of those items of product, service, warranty and price that we can concede and those points which we cannot. Let’s examine three recommendations that will help move the negotiation down a smoother path to success.

Recommendation #1–

Establish expectations. What are you not willing to concede? Where does the majority of your profit come from and how will you protect it?

If you considered buying hybrid Prius at 45 mpg when gas was $4/gallon, the wait for delivery was three months!  The salesman may even have stated that  “Our price is non-negotiable”.

One might expect that statement with short supply and high demand. This is an upfront exclusion from the negotiation. The announcement is that this point is not up for discussion. It’s like telling you fiancée before you set the wedding date, by the way “I don’t do windows”. Establishing expectations will save time and narrow down those points that can be negotiated.

Recommendation #2–

Know your concession strategy.  What have you experienced in a similar situation? Will the client perceive what you concede as value and will it bring you closer to an agreement? Put yourself in the client’s position. Do they see your concessions providing tangible benefits that would impact their business in a positive way?

Recommendation #3

If it ain’t worth nuttin’ to you, it ain’t worth nuttin’ to nobody. The client wants to see that you’ve made a sacrifice which is of value. We also want to give the reason and logic behind what we concede so it doesn’t come across like we’re giving away the farm. Once you give a concession you need to tie it to a counter demand which is asking the client to concede to what you’re asking in return. For instance, if the client demands a 5% discount and an extra 90 days on the warranty, you can acquiesce by saying you will agree if they will provide the PO by Friday and that there are no more demands. It’s a matter of give and take to gain a mutual agreement where both parties view the agreement as a Win-Win.

Establishing expectations, know what you can and cannot concede, show some pain, and tie your concession to a counter demand. These recommendations will help shorten your sales cycle and increase you chance of success for both you and the customer. Good selling!

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editors Note:  This two part post specifies how to deploy specific tactics in alignment with your concession strategy.

Plan your concession strategy to enhance sales success and customer satisfaction.  Good concessions are donations of perceived value, not demonstrations of gamesmanship.  Perceived value means the importance the other side attaches to our concession. 

Gift certificates as an example

Merchants love to sell these because they are priced at retail, they bring customers back, and they have a low redemption rate.  As part of a settlement negotiation with an unhappy customer, gift certificates are a common concession.  The customer may never use it, but it satisfies the demand that the “You owe me” debt be paid off.  Thus we concede a high perceived value item at a low actual cost. 

Build concessions into your negotiation plan

The buyer has an emotional imperative to win by beating us down on the price, squeezing an earlier delivery, extending the service warranty, etc.  Knowing the importance that the customer places on each negotiable topic determines which concession to offer.  For example, if we know that price is the hot button, then leave some bargaining room, and plan to give ground on this point.

Give ground reluctantly

It must appear to have value to us to be worth anything to someone else.  A concession must be surrendered reluctantly like a trophy to a victor.  Suppose that we can meet a customer’s time demands without great exertion or expense.  If we proudly answer, “No problem” to his request, that concession has very little perceived value.  The task here is to turn low actual value to us into high perceived value to them. 

“What would you be willing to do for me?”

Include this comeback as part of your built-in concession strategy.  It increases the perceived value and invites get as part of the give.  A clever negotiation tactic is to dangle the concession on the condition that we get something for it in return.  Instead of casually agreeing to a buyer’s offer that we could afford, better to respond, “I do not know if I can get them to go for all of that.  What would you be willing to give me as ammunition so I can sell them on it?” 

Even if you have the authority yourself, work to get a reciprocal concession as ‘payment’ for your reasonableness. 

Your concessions, like the overall negotiation, plan should be in writing.  Prioritize the list of concessions from most to least important to you, and estimate the perceived value to the buyer.  The discipline of listing and prioritizing will help to keep on the path through the smoke and flames of the negotiation process. 

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Anyone engaged in foreign trade must be conversant with INCOTERMS 2000.  Devised and published by the International Chamber of Commerce, they are at the heart of world trade. These internationally accepted commercial terms define the roles of the buyer and seller and identify when transfer of ownership takes place. INCOTERMS should be an integral part of a purchase and sales agreement in global commerce.

All of this information is subject to change so consult competent legal counsel.   Buyers or sellers engaged in international trade should also know about the Convention for the International Sale of Goods (CISG).

EXW – Ex Works –Title and risk pass to buyer, including payment of all transportation and insurance cost, at the seller’s door. Used for any mode of transportation.

FCA – Free Carrier – Title and risk pass to buyer, including transportation and insurance cost, when the seller delivers goods cleared for export to the carrier. Seller is obligated to load the goods on the Buyer’s vehicle; it is the Buyer’s obligation to receive the Seller’s arriving vehicle unloaded. 

barge image courtesy of McDonough Marine

FAS – Free Alongside (Ship, Barge, Watercraft) – Title and risk pass to buyer, including payment of all transportation and insurance costs, once delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export clearance obligation rests with the seller.

FOB – Free On Board – Risk passes to buyer, including payment of all transportation and insurance cost, once delivered on board the ship by the seller. Used for sea or inland waterway transportation.

CFR – Cost and Freight – Title, risk and insurance cost pass to buyer when delivered on board the ship by seller who pays the transportation cost to the destination port. Used for sea or inland waterway transportation.

CIF – Cost, Insurance and Freight – Title and risk pass to buyer when delivered on board the ship by seller who pays transportation and insurance cost to destination port. Used for sea or inland waterway transportation.

CPT – Carriage Paid To – Title, risk and insurance cost pass to buyer when delivered to carrier by seller who pays transportation cost to destination. Used for any mode of transportation.

CIP – Carriage and Insurance Paid To – Title and risk pass to buyer when delivered to carrier by seller who pays transportation and insurance cost to destination. Used for any mode of transportation.

DAF – Delivered at Frontier – Title, risk and responsibility for import clearance pass to buyer when delivered to named border point by seller. Used for any mode of transportation.

DDU – Delivered Duty Unpaid – Title, risk and responsibility of import clearance pass to buyer when seller delivers goods to named destination point. Used for any mode of transportation. Buyer is obligated for import clearance.

DDU – Delivered Duty Unpaid – Seller fulfills his obligation when goods have been made available at the named place in the country of importation

DDP – Delivered Duty Paid – Title and risk pass to buyer when seller delivers goods to named destination point cleared for import. Used for any mode of transportation.

Note: EXW, CPT, CIP, DAF, DDU and DDP are commonly used for any mode of transportation. FAS, FOB, CFR, CIF, DES, and DEQ are used for sea and inland waterway

 Editor’s note: Linda Swindling is a regular guest contributor to this blog. 

Linda Byars Swindling, negotiation authority, former employment attorney, and author

Great negotiators don’t worry about paying the monthly light bill. Angst over personal finances or job security weakens your negotiation performance. Here are 7 ways to address personal needs and improve negotiation performance:

 1.      Clean up your financial house. If you are working  just to pay off debt, it is hard to get motivated each day. Pay credit card balances in full monthly  and/or move to a lower interest rate. Downsize, simplify, and live beneath your means.

2.       Establish an emergency fund. If you don’t have one, delay purchases, work a second job, sell the things you don’t need, eliminate luxury expenses,  dining out…. 

How to be the Family CFO by Kim Snider

 3.      Determine your net learning for the year. Yes, net learning not earnings. If you had to go get a job tomorrow would you be competitive and current? If not, sign up for a course or ask for a project to expose you to those needed skill sets. Have you learned so much this year that you must update your resume to reflect your accomplishments and the responsibility you took?