January 10th, 2018
purchasing and supply – Negotiation Process
The decision to award the contract to a specific supplier follows a negotiation process that considers aspects such as suppliers’ qualifications and the terms that such suppliers offer for the contract. In the negotiation process, the supplier qualifications generally constitute external factors of the process since they are not negotiable due to their historical nature (Biel, 2009). For instance, prior supplier performance is based on the prior contracts that the supplier has had hence may not be modifiable during the course of the negotiation. On the contrary, the terms to a contract form the basis for the negotiations that occur before the award of the contract. On such terms, the buyer and supplier seek to have the opposing side offer the terms favorable to their respective entities (Biel, 2009).
Most negotiation process entails a zero-sum game where one party gains what the corresponding party gives up. For instance, a powerful buyer could dictate terms that any prospective supplier must agree to for a contract award, i.e., the “take it or leave it offer” (Biel, 2009, p. 8). Such an approach could for instance be evident in the strategy that Wal-Mart uses to have its suppliers agree to lower prices, in pursuit of its cost leadership strategy (Trefis Team, 2011). Use of such a negotiation strategy arises where the buyer’s bargaining power is very high, for instance, where the buyer is a major player in the market for the products that the supplier trades in. A disadvantage of such an approach to negotiation would be that the buyer could be forced into renegotiations in the event the supplier rejects the offer, thus resulting in the buyer wasting a significant amount of time (Biel, 2009).
A second mode of negotiation proceeds via the competitive tendering approach. In such an approach, multiple suppliers are invited to make their bids with the goal being to award the contract to the supplier who provides the most competitive offer (Biel, 2009). Depending on the extent of the disclosure of the bids presented by other suppliers, competitive tendering may adopt various approaches. In a full disclosure process, the dynamic open-descending-bid format, suppliers react to the bids offered by the competing supplier by lowering their bids until one supplier, one with the lowest bid, remains (Biel, 2009). On the opposite extreme, the sealed-bid format, the buyer does not disclose the bids submitted by competing suppliers, an example of which is found in the U.S. federal government’s procurement process (Biel, 2009).
Other forms of negotiation processes lie between the two processes described. For instance, a negotiation process could entail the buyer providing a reserve price, the maximum at which he or she can pay for the contract, with the negotiations following a competitive tendering approach (Biel, 2009). Once the most promising supplier is identified from such a reserve price-limited approach, the buyer can engage such a supplier in further negotiations to set the final terms of contract performance.
Although zero-sum negotiation processes are the most common, some negotiations may not result in a zero-sum game. For instance, such would be the case in contracts where the buyer and the supplier are industries that are in a symbiotic association. Chen, AhmadBeygi and Cohn (2009) provide one such example in truckload procurement processes, where the buyer (shipper) and the supplier (carrier) can both benefit from the process. In this respect, where the shipper invites bids for multiple lanes, and the carriers bid for a sets of lanes required by the shipper, the shipper can award the contract to the set that best represents his or her interests (Chen, et al., 2009). Pursuant to such an award, the shipper (buyer) benefits by having ones interests met and the carriers (suppliers) benefit by reducing empty truck movements. In such a way, a zero-sum game does not arise.
Go to part eight here.