Purchasing and Negotiation Training

Harry Hough, PhD, founder of the American Purchasing Society

Editor’s Note: Dr. Hough is a frequent contributor to this blog.

No important military action is likely to be successful without preset objectives. It may not be completely appropriate to compare negotiating a purchase with a military operation, but better purchasing results are obtained when objectives are established beforehand.

What Objectives

The first thing to consider when planning a negotiation is to decide on what the objectives are. Here are some of the more common things of concern about most purchasing transactions.

Price

Long Term Costs

Product or Service Specifications

Delivery Date

Payment Terms

Length of Warranty

Warranty Coverage

Legal Jurisdiction

Packaging Requirements and Charges

F.O.B. Terms

Freight Charges and Carrier Used

Order Quantity

Length of Agreement

Cancellation Terms

Patents and Copyrights

Maximum and Minimum

The best target objective for each subject well as the least acceptable target should be decided. Some items will only have one satisfactory objective. Other items may have a wide latitude. For example, 12 may be the only acceptable order quantity because each piece of the item costs thousands of dollars. On the other hand, acceptable payment terms may vary between 2% 10, Net 30 to Net 60 because that is not as important to you. During the negotiation, you will be willing to compromise or give up on your less important objectives in order to obtain your more important ones.

Long term costs should be your first priority because that objective includes many of the other objects. You will give in on the objectives that are less important to you but may actually be most important to the supplier. The supplier will give in on the objectives that are less important to her and be more hard-nosed about the objectives she must have to close a deal.

Use Data to Determine Probabilities for Success

Setting objectives should not be arbitrary. They should be based not only on what you would like to achieve, but on what seems possible. A realistic estimate of possibilities can be made by analyzing the marketplace. For example, it will be very difficult to obtain price decreases if business is booming and the supplier is fully booked with orders far in advance. It will be much easier if the economy is down and the supplier has plenty of unused capacity. If you know that other suppliers have lower prices or are just hungry for business you have a better chance of getting your supplier to cancel the increase.

Look at the Price History

The purchasing operation should keep price history records. Compare the changes shown in price history with changes in the Producer Price index or even the Consumer Price index for similar periods. It is best to look up the code for the Producer Price index product category rather than use the summary index for all products as price movements will be closer to actual for a particular product. Compare the index with the supplier’s price changes. Suppliers often fail to change prices in spite of cost changes for fear of losing business. They postpone increases until they are forced by the economy to make very large increases. However, any supplier who has gone for years without asking for an increase in spite of rising costs means he has probably been overcharging for years.

Be Ready to Compromise

Leave room to negotiate. Don’t expect to obtain every objective. Don’t negotiate so well that you leave the supplier with little or no profit. That may reduce your costs in the short term, but if the supplier decides the product is not profitable, he may stop selling it and you will be forced to go elsewhere, or he may simply lower his quality to save costs. You will be better off if you allow the supplier to believe he has done well.