Purchasing and Negotiation Training

Harry Hough, PhD, founder of the American Purchasing Society

Editors note: Dr. Hough is a regular guest contributor to this blog.

Different methods apply when negotiating and purchasing services. Typical services used by most businesses include repair or maintenance of equipment, cleaning, and landscaping. Professional services such as accounting, legal , and engineering require unique treatment. Design and advertising services are other areas needing attention.

Purchases for tangible products are covered in the law by the Uniform Commercial Code whereas in most areas the purchases for services fall under the guidelines of the common law. The UCC does much to protect the rights of the buyer and facilitates transactions. Absent protections offered by the UCC, the buyer must be careful to negotiate an agreement that protects issues accurate and complete documentation that records the purchase.

Selection of a Qualified Supplier
It is easier to pick a supplier with a tangible product.  It is more difficult to evaluate a service. Therefore it is more important to obtain creditable references and check them out thoroughly. A minimum of three references may be sufficient for other types of suppliers, but it may not when you want to select a new supplier for a service. The number of references and thoroughness of the checking should depend on the dollar amount of the expenditure and the importance of the service. Investigating a half dozen valid references isnot unreasonable.  Make sure the customers are not related to the supplier. Evaluate the type of customer given as a reference. For example, is the customer a major company or a tiny business with few facilities or employees? Not always, but usually, larger organizations tend to do a better purchasing job. Although the reference from a larger organization is a favorable sign, it also might indicate that the service supplier may be more expensive or more difficult.

Prepare a list of questions to ask the customer reference

Do nt ask simple yes or noquestions.  Get the reference to elaborate on answers. For example, instead of asking if he or she is satisfied with the service, ask what is liked most about the service or what is liked least. This will give you much more information and you can use the information when calling the next reference to either indicate a similar performance or to indicate that it might be an isolated instance.

Negotiating the Agreement
Use any information you gained from the references to question performance. One reference may have indicated that the supplier did not always arrive on the scheduled day. This gives you the opportunity to question the supplier about schedules and regularity. However, it is not prudent to indicate which reference said what.

Ask the supplier to break down costs. Learn how charges are made. Is it an hourly rate? How much? What are total estimated hours required to do the job? Ask for a firm total cost. If the supplier indicates that it is impossible to say because each job is different, ask if a minimum can be given as well as an estimate of the actual cost. Ask for a detailed description of any required material needed along with separate prices for the material. Such items include, but are not limited to, repair parts, paint, and landscaping material used for the service. Ask that no markup be charged for material. Alternatively, the buyer may want to make any necessary purchases. In either case the reasonableness of the prices for material can be checked or controlled.

Protect the Company’s Interest
Make sure that any service supplier has workmen’s compensation insurance and liability insurance in force and in a sufficient amount. Obtain a copy of the insurance policies before allowing any work to be done on the premises. Get the supplier to sign an agreement not to disclose any information about the company to a third party. Make sure the supplier is aware of, and abides by local, state, and federal laws.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

In Part I we examined big picture negotiation concepts.  In Part II, we’ll delve into questionable customer behavior and stress the value of negotiation strategy over tactics.

Hot Potato tactic

Instead of stressing lowest TCO in the work-a-day world, we fall prey to our own lack of negotiation skill.  Here is how the customer out-negotiates us with the Hot Potato tactic.  He invites you to his office to “negotiate”.  He makes you comfortable, shares a little small talk, then looks into your eyes while intoning insincerely, “Your Quality, Service, and Delivery are all top notch or you would not have a seat at the table – so it call comes down to Price.  What can you do?” 

In one smooth maneuver, the customer has buttered you up and crammed the Hot Potato of Price down your throat.  If you swallow it whole, you may convince your self that the customer appreciates your higher value and “in this Price competitive market”, you must lower your price. 

He won everything, getting the lowest cost and a lower price.  Negotiation is never just a matter of Price.  Furthermore, for the same reason that we do not buy heart surgery from the lowest bidder (who even compares prices), the other cost advantages of QSDP are more important.  Any professional buyer knows for an absolute certainly that she can always get a lower price.  He also knows that a low price often come at a high costs. 

Strategy over Tactics

The uninitiated think of negotiation as the deft application of tactics and parrying of counter tactics.  Certainly, that is part of it.  But the focus on TCO yields far better results for these reasons:

1. The customer is best served by the lowest TCO
2. TCO puts all four cost balls in play at the same time, giving us quadruple the negotiating power.
3. Everyone knows that higher quality comes at a higher cost – just ask that cardiac surgeon

Some customers will not care about lower costs and only want low prices.  You must decide if you want this type of business for what ever strategic reasons you have.  There will be customers that you do not want to serve.  There is nothing wrong with that and indeed everything right with it.  When we delude ourselves into thinking that we need the sale, or the cash flow, or other ways we convince ourselves to take a sale at a loss, no negotiation skill will rescue us from our selves.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: In Part I we’ll examine big picture concepts of negotiation.  In Part II, we’ll delve into some questionable customer behavior.

Negotiation is the most important business skill we’ll ever master, yet it is often among the missing in our profits tool box.  We think of labor productivity, equipment, and techniques, as our stock in trade.  Certainly, all these are mandatory resources to prosper in the business, but none have the single largest impact on profits, cash flow, and long term viability as negotiation does. 

Negotiation is a mixture of business arts and sciences that works best when viewed as a set of economic principles.  This cost centered philosophy rejects the price obsession that characterizes the business world. 

Negotiation is not an argument over price 

The financial reality is that a buyer will pay a higher price if it buys a lower Total Cost of Ownership (TCO).  Disagree?  Let’s first distinguish between price and cost from the customer’s perspective.  For example, suppose you can buy one of two units priced at $750 or $500.  If low price is the deciding criterion, no question, the $500 unit wins.  However, if the higher priced $750 unit lasts for 2 years and the lower priced $500 unit lasts for one year; the $375 TCO of the higher priced unit clearly makes it the better buy.  Lowest TCO is by definition the best value. 

Quality, Service, Delivery, and Price (QSDP)

Our negotiation mission is to consistently demonstrate how our lower TCO provides better value to customers.  The four elements of cost always present in our negotiations are QSDP.  Any cost impact can be slotted in one of these categories.  A better trained work force is Quality cost advantage.  Superior warranty due to better materials and design are Service cost advantages and a better schedule due to planning and personnel cost advantages constitutes Delivery savings to the owner. 

The most frequently cited, yet most elusive goal is to remove price a bargaining point from the negotiation table.  It will happen when we focus our negotiation efforts on the lowest TCO for the customer.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: This is Part I of a two part story on warranties.  Part I sets forth the frame work and definitions while Part II cites examples. 

A warranty is essentially a guarantee of certain promises in the purchase and sales agreement.  Warranties can relate to a product’s ability to perform as agreed or of the maker’s responsibility for repair or replacement of defects, or even ownership and patent protections.  In some cases, warranties provide remedies for failure to comply with contractual provisions whether stated or provided by applicable law. 

Beyond these broad definitions, what do professional buyers need to know about warranties?  Above all, buyers must seek a lawyer’s advice.  This blog entry is intended only to stimulate awareness amongst purchasing pros of warranties, whether statutorily afforded or negotiated.  For the purposes of this discussion, we will limit ourselves to commercial transactions within the US. 

The Uniform Commercial Code (UCC)

The UCC affords warranty protections for the purchase of goods, not services.  The UCC is not a federal law but has been adopted virtually in tact by 49 states – Louisiana being the exception.  Some warranty protections are included whether or not stated in the PO.  The chart below sets forth the basic warranties of the UCC.  There are curious exceptions such as minerals that are severed from the land by buyer or seller so seek competent legal counsel in such matters.

Want to know more?  Take the Purchasing Law Quiz

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: This is Part II of a two part story on warranties.  Part I sets forth the frame work and definitions while Part II cites examples.

The implied warranty of fitness for a particular purpose requires a bit more explanation.  It says that a product is warranted against defects when used for the specific purpose intended.  To be clear, the supplier must know the intended purpose.  A case in the late 90’s illustrates this warranty.

A table-tennis table manufacturer made tables for the specific purpose of out door recreation such as scout camps, vacation resorts, and cruise ships.  To address the aggressive climatic influences of freeze-thaw cycles, marine exposure, and ultra violet radiation, the manufacturer contracted with a well known coatings supplier to design and apply an appropriate coating system to its tables.  

The coating supplier knew how the tables would be used and all the climatic influences.  The coating supplied failed.  The manufacturer sued and won pursuant to the implied warranty of merchantability for a particular purpose. 

Another curiosity of warranties is the definition of goods.  They are identified as things in the UCC, not a very satisfying definition. In a landmark case involving cardiac surgery at a famous east coast hospital, a procedure involved removing, cooling, and recycling the patient’s the blood, adding pharmaceutical substances, and re-introducing the blood to the body. 

The patient died and the decedent’s estate sued.  Among other causes of action was the warranty of fitness for a particular purpose.  The defendant surgeons and hospital had the case thrown out, claiming that cardiac surgery was clearly a service, not goods.  The case was reinstated on appeal as the estate was able to convince the court that when the blood was removed from the body and enriched by added chemicals, the blood became goods for warranty purposes! 

Warranties offer no magical supplier management solution.  They are merely another arrow in the quiver.  Nothing replaces qualifying, evaluating, and managing supplier performance over time.  The best results will always come from the lowest Total Cost of Ownership supplier that consistently provides the best mix of quality, service, delivery and price.  

Further, to enforce warranty rights, you will need to sue.  A major problem is the cost of legal action, which may exceed the recovered remedy and consume years of time and expense.  At the end of the protracted litigation, if the supplier is still in business, and if the supplier has the money, you will then get money, not the goods you wanted. 

The moral of the story is that purchasing pros must know about warranties but manage supplier relationships so we never have to use them.

Want to know more?  Take the Purchasing Law Quiz.

Editors note: Steve writes, speaks, and consults on customer service.

Every service and sales professional faces the same dilemma on a daily basis whether customers contact them via telephone, walk in to their establishment, or correspond in writing. It is not driven by malice or deceit. Most often it is simply the natural progression of the sales and service process. Your transaction is moving ahead smoothly when the customer stops to ask a question about the product, service or company policies. Then anxiety builds up inside. You would prefer to say “Yes.”, or “Certainly, our product can do that.”, or “I can ship it today.” But you will not utter any of those phrases today because you must speak the truth. And the truthful answers are “No.”, or “I am sorry, but our product does not do that.”, or “I can not ship it today.”

The quandary is about how to say “No.” Saying “No” might make you feel unpopular or appear like a killjoy. Conveying seemingly bad news to someone else might bring to an end all of the goodwill that you have been creating while attempting to negotiate a sale or provide a service. Regardless of how a service professional might feel personally about having to say “No” to a customer, sometimes the answer must be “No.” What separates the seasoned professionals from amateurs in the sales and service business is the manner in which saying “No” is conveyed.

Steve’s Customer Service Handbook

The concept of knowing how to say “No” begins with an adherence to the fundamental principle of saying what you can do rather than what you can not do. When a service professional conveys what they can do, it keeps the proverbial door open so that the dialogue with the customer so that they may continue with their business relationship. However, when a service professional resorts to what he can not do, it threatens to limit future dialogue as well a business relationship.

A client has, with a simple phrase, heightened their service vernacular and the satisfaction of their customers. That phrase is: “Here’s what I can do.” This axiom is posted in the workstation of each of their customer service representatives, to keep it at the forefront of their mind. It produces two key benefits: (1) it keeps the door open and, (2) it gives the service representative something to say while he thinks creatively about how to respond to customer demands. When it comes to keeping customers satisfied and the door of business opportunities open, a little time may make all the difference.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Of course you should!  

All of us who have succeeded at the procurement profession owe a special obligation to pay the good fortune forward.  The purchasing profession has been forever notorious for its lack of training, education, and in many instances, corporate support.  To improve the talent pool and give a hand up to those who follow, let’s provide to them a service that we would have dearly loved to enjoy all those years ago.

A report by AMR Research ranked the 21 colleges and univeristies in the US with Supply Chain Management degree programs.  Amost all have a mentoring program, formal or informal.

The Scary Setting

Recently, the Institute for Supply Management (ISM) Affiliate in Dallas asked for volunteers to serve as mentors for graduate students at University of Texas at Dallas (UTD).   Not only are some Affiliate members personal and professional friends, ISM Dallas is also a training client.  I gladly volunteered but knew not what to anticipate as the handful of mentors were scheduled to “speed date” with more than a score of University of Texas at Dallas (UTD) undergrad and grad students, all enrolled in UTD Supply Chain Management (SCM) degree programs. The prospect of some over the hill baby boomers speed dating with SCM majors at UTD was frightful; suppose that it  turned out to be as comfortable as a ride on a UFO?

An Epiphany for Mentors

Nearly all students had not taken a courses in Purchasing.  However, everyone had depth in Operations Management and most had extensive education in Logistics.  The old joke (true story) about purchasing pros getting the same amount of education and training in a career as a sales pro gets in a year took on a new meaning.  Now, it seems that Purchasing is the Rodney Dangerfield amongst even all the SCM fellow professions.

Click to see Bob's online training courses

An Epiphany for Mentees

Most were stunned to learn that purchasing had the greatest affect on profitability of all business pursuits.  Many wanted to know more about Purchasing and how they could pursue it.  With so many finance or engineering backgrounds, they were already on the right path.  Procurement favors process thinking but to succeed, they will need to develop the outward focused social and communication skills that many tech oriented personnel so effectively shun.

The Outcome

The ship has sailed but the course is still being plotted.  Stay tuned for updates.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Negotiation unfolds neither in a linear nor a necessarily logical fashion.  Depending on their skills and experience, negotiators can and do jump in at any point, often with no strategy and a heavy handed reliance on tired tactics.  These faux pas signal minimal to no preparation, little understanding of the process, and discomfort with one’s own skill levels in negotiation.  Accordingly, pros must be prepared to play the game from any position.

Arts and Sciences

Think of negotiation as a mixture of arts and sciences, the process or mechanics are composed of two parts:

Preparation and planning      90% of the time investment

Face/face and voice/voice    10% of the time investment 

The ten percent sliver can be overwhelming without ability and skill with Tools, Techniques, and Tactics.  These are identified below to help us overcome that fear.  First, we must recognize these two facts:

• Communication skills are the stage upon which negotiation is played out
• Tactics, although necessary, are inadequate for good negotiation outcomes

There are four strategies, Win-Win, Win-Lose, Lose-Win, and Lose-Lose.  All are appropriate depending upon the importance of the Issue and the Relationship.  See Fig.5.1 at left

Given the emphasis on strategic Sourcing and Preferred Suppliers, manifested most often in Single and Sole sources, most of our negotiations will fall into the Win-Win quadrant, even if we may need to educate some of our suppliers to this fact from time to time.  Partnering is a refined form of Win-Win strategy.  It succeeds as the parties focus on cost reduction as the motivating rationale for doing business. 

Tools

We may not have thought of these familiar practices as negotiation tools.  Apply them frequently and think of every workplace challenge as a negotiation opportunity.  The overarching and unifying concept is Total Cost of Ownership (TCO).  TCO is the sum of its four elements. Simply stated, the lowest TCO is the Best Value

TCO = Quality + Service + Delivery + Price

Our constant obligation is to think in terms of TCO.  To do, create a mini-negotiation plan by identifying and ranking cost drivers  Once the costs have been identified and ranked, we establish a concession strategy, the engine of negotiation.  The pistons of the engine are these tools:

High Initial Demand

Nice to have

Must have

We must also estimate these three positions of the other side and keep these tools in constant use:

• Price Analysis
• Cost Analysis
• Supplier Management tools
  • Certification
  • RFQ/RFQ evaluation
  • Performance evaluation
  • Score Cards
  • Supplier Corrective Action Reports (SCAR)
  • Continuous Improvement plans

To be continued in Part II…

For your copy of the book, You’re the Buyer – You Negotiate It, or CD sets, please visit  this site.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

The inability to communicate effectively will derail the best thought out and researched negotiation plan.  To communicate well in English, let alone foreign cultures, we must appreciate the social and physiological factors affecting voice communication, by far the most predominant form. 

Communication Elements

The four Literal Elements of communication and their approximate proportions in negotiation are:   

• Speaking    30%
• Listening    45%
• Reading      16%
• Writing        09%

 The two Figurative Elements that have far more intangible impact are: 

• Body Language   
• Open Mind

 It is also essential to understand the since negotiation is almost universally a stressful event, stress induces a flight or fight behavior.  This forces us to our dominant and strongest personality type.

The importance of knowing personality types is that personality types drive one’s communication style.   The graphic at the right offers a recap of personality types and the associated communication styles.

Communication Techniques

Here is a recap of some of the techniques that we discussed in the seminars.  You’ll find much more detail in Chapter 6 of the book and supplemental information on the 3 CD set.

• Language Clues
  • Quickness
  • Gaps
  • Repetition
  • Breathing
• Eraser words
  • “I’m sorry”
  • “But” – use “and” instead
  • “To be honest
    • Eloquence
    • Conditional Language
    • Open-ended and close-ended questions
    • ‘I’ and ‘You’ statements
    • Reflective response
    • “Huh” statement
    • Distinguish observation from conclusion
• Announcer statements
  • “As you know”
  • “By the way”
    • Establish expectations
    • Anger and confrontation
    • Never accept a ‘no’ from someone who cannot say ‘yes.’
    • Dumbness
    • Never agree or disagree with explanations
    • “Tell me about it.”
    • What-if” questions
    • No
    • Non negotiables
    • Listening to an ‘extremist’

Tactics

Tactics are purposefully left for last as they are a function of and dictated by your strategy.  Nevertheless, tactics come in for quite a bit of glory by those with a superficial mastery of negotiation.  The greatest value of tactics is in the old battle filed algae, “A tactic recognized is a tactic neutralized”.

As we grow in negotiation skill, it might be surprising at how obvious or awkward the use of tactics of others will seem. Often, our counterparts will not know or understand the tactics they are using.

Here is a recap of some of the tactics discussed in Chapter 9 of my book.  Supplemental information on Personalities and Communication  and Tactics is available on the CD sets.   For your copy of the book, You’re the Buyer – You Negotiate It, or CD sets, please visit  this site.

Maneuvers

• Higher Authority
• Split the Difference
• Trading Concessions
• No Statement

The Flyers

• The Flinch
• The Hot Potato
• The Do Better
• Silence

The Gambits

• Good Guy / Bad Guy
• The Invalid Offer
• The Lesser of Two Evils
• Sacred Writings

The Ruses

• The Head Fake
• The Straws
• Funnie Munnie
• Madman Mania
• The Walk
• Artful Anger
• Self Control
• Puppy Dog Close

Harry Hough, PhD, founder of the American Purchasing Society

Editors note: Dr. Hough is a regular guest contributor to this blog.

All terms and conditions are subject to negotiation. A common practice for many suppliers is to have either preprinted payment terms on invoices or to insert terms that were never agreed upon. Some buyers may ignore these contradictions to their agreements and allow their own accounting departments to pay as they see fit, but there are several reasons why this is not a good idea.

Assume that you have negotiated for Net 60 and wrote that on your purchase order. Then the supplier ships the goods and sends an invoice with payment terms of Net 15. You do nothing and your accounting department pays the bill in sixty days. Meanwhile the supplier’s accounting department assumes you have paid late and, when asked by business rating services, answers that you are 45 days late in paying your bills. Bingo! Your company has unjustifiably earned a poor credit rating.

Suppose instead of doing nothing, you object to the salesperson. You tell him you are very unhappy with the payment term on the invoice that does not match your contract or the term specified on your purchase order. He tells you not to worry, it doesn’t mean a thing. He says that is only a standard term for others. Don’t believe him. Maybe the supplier won’t refuse your business, but your credit rating could still reflect a bad report.

Or suppose your accounts payable people ignore the term on your purchase order and pay as indicated on the invoice instead. In this case you are being misled about the cost of the purchase since time is money and by paying earlier than what you specified your company is paying a higher cost.

If invoices aren’t usually seen by purchasing, the buyer should still make sure that accounts payable is comparing P.O. terms with invoices and making sure they agree.