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inevitable consequences
many other aspects
raw materials
The Value Of Negotiation
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As we move away from recession, low growth – call it what you will, many companies will determine that they will have ‘to do more with less’. One of the inevitable consequences of that is that quality will become vulnerable and with that, service and product support will decline.

Many large companies today have specific 'stand alone' purchasing departments with a mandate to reduce the company's overall spend, be it on raw materials, services or general expenses. Many use the 'Request for Proposal' or RFP process where potential suppliers are asked to submit specific pricing and only the two lowest are invited to the table for further discussion which may become a negotiation or just an effort to beat the price down even further. This means that cost then prevails over value.

A better approach would be negotiation where many other aspects of the business can be taken into consideration.

Consider this example where customer X sends out an RFP for a price per unit for the supply of 14 million units per year. Supplier A wins the business at $6.50 per unit.

Suppose customer X was to negotiate with supplier A and the following deal was agreed.

1. Supplier A would keep a buffer stock at X's premises which A would pay for on a monthly usage basis.

2. X would pay strictly on the 30th of every month.

3. Both would enter into a 5 year contract.

4. Every 3 months both teams would review the supply situation with the express purpose of improving the deal for BOTH sides. At the same time the price would be reviewed to ensure that both sides either maintained or increased profitability.

5. A hot line would be established between both companies to resolve any day to day problems.

6. A random quality parameter was established to ensure that quality was never compromised.

7. The initial price was agreed at $6.35 per unit.

Now compare the value of the two deals:

RFQ. Total cost of $91 million per year. No safeguards against quality, supply or profit to both X or A.

Negotiation. Total cost of $88.9 million for year 1. Quality and supply guaranteed. Open dialogue protecting ongoing profit for both A and X.

Which deal has more value?

Many so called ‘source’ companies put a lot of effort into vying for business with no effort in keeping it once they have gained it. You see this in the communications industry with the different kinds of incentives that phone/TV/internet providers offer to gain your business and then having done so erode away all those incentives without a care to the loyal customer especially when something goes wrong. As an example I cut through the telephone line in my yard a couple of years ago. Fortunately I had a cell phone to report the problem to Verizon. After 5 days with no phone, I succumbed to Comcast’s attractive offer. After I have signed up for a two year deal and had all the modems, boxes etc put in place, Verizon calls on a persistent basis to try to get me back as a customer – a bit late then. Now my monthly bill is more than twice what it was originally, but unfortunately when I try to talk to someone about it you get the message “your call is very important to us, please stay on the line….”. How long do you stay on the line until you realize that the only way to get their attention is to switch back to Verizon!!

Another outcome of the recession is the promotion of financial background managers to CEO. I think this is done on the basis that cost control is critical and financial managers are best qualified to do this. The downside is cost tends to be looked at in isolation. For example look at BP and how “cost cutting” became the culture, so much so that safety became compromised with disastrous consequences.

The other side of the coin is what opportunities can be made to extract extra cash from the customer. For example all the major airlines(Southwest excepted) have climbed aboard the band wagon to charge the odd $25 for a checked bag. Some even boast how much this has generated in income. The problem is that no account is taken of the unbelievable disruption this causes. Take a look at a full flight(e.g. a Boeing 757) as it is ready to board the passengers(mostly paying customers). There is a mass scramble to get to the front of the line so that passengers can get some overhead bin space for their vast amounts of so called “carry on” baggage. As the flight boards the cabin crew become more and more frustrated as the bins get full and there is nowhere to put the bags of those passengers who have been unfortunate enough to have been ‘elbowed out’ towards the rear of the boarding line. Then the Captain gets frustrated as an ‘on-time’ departure looks like it’s going to be an impossibility.

These are some examples of how companies will strive to get ‘more for less’ without any concern for the customer. We have to learn to take a broader approach to this issue. Clearly there is benefit to be gained by looking at the wider picture and one way to do this is to introduce the “value over cost” that takes into account all the entities who are involved in the whole business process.

So that begs the question - how to get value? One clear way of doing this is to use the art(or maybe science) of negotiation. Looking at negotiation enables one to look at a much wider picture than just cost and therefore increase the value of a deal, be it purchasing, selling, service, management, legal or financial.

The interesting thing is many modern executives will claim to be competent in negotiation without ever having any training in it. Negotiation training seems to be way down the priority list today while if you think about it, it should be right at the top to support the on going effort to 'get more for less'.

Street Talk

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