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    Toaz - Info Negotiating Amp Contracting in Procurement and Supply d4 PR

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    pearl

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    © All Rights Reserved
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    ens SSpu/ fossa CIPS STUDY MATTERS COURSE BOOK Negotiating and Contracting in Procurement and Supply Negoitig and Contacting in racurement and Supply © Profex Publishing Limited, 2012 Printed and distributed by: ‘The Chartered Institute of Purchasing & Supply, Easton House, Easton on the Hill, Stanford, Lincolnshire PES 3NZ Tel: +44 (0) 1780756 777 Fax: +44 (0) 1780 751 610 Email: info@cips.org Website: wuvwcips.org ( First edition September 2012 All rights reserved. No part ofthis publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the fen permission of Profex Publishing Limited. While every effort has been made to ensure that references to websites are correct at time of going to press, the ‘world wide web is a constantly changing environment and neither CIPS nor Profex Publishing Limited can ‘accept responsibility for any changes to addresses. We acknowledge product, service and company names referred to in this publication, many of which are trade names, service marks, trademarks or registered trademarks. CPS, The Chartered Institute of Purchasing & Supply, and its logo, are all trademarks of the Chartered Institute of Purchasing & Supply. Contents Page Preface v The Unit Content vil How to Use Your Study Pack xi 1 Developing Commercial Agreements 1 Commercial agreements; quotation and tender documents; specifications; key performance indicators; contractual terms and schedules 2 Legal Issues in Creating Commercial Agreements W Elements of a binding commercial agreement; invalid and incomplete agreements; issues in offer and acceptance; standard terms of contract; the implications of international lav 3 Contractual Agreements for Supply 35, One-off purchases; blanket call-off and systems contracts; framework arrangements; services contracts; hiring and leasing 4 The Role of Negotiation in Procurement and Supply BL Commercial negotiation; negotiation in the sourcing process; negotiation in conflict resolution; negotiation in team and stakeholder management 5 Negotiation Outcomes and Approaches 07 Outcomes of commercial negotiations; orientations to negotiation; distributive negotiation; integrative negotiation; principled negotiation; developing target outcomes for negotiation 6 Power and Relationships 81 Power and influence in commercial negotiation; sources of power and leverage; the relationship context; what kind of relationship is best?; building and maintaining, positive relationships; repairing damaged relationships 7 Cost and Price Analysis 103 How suppliers set their prices; understanding costs; costing methods; understanding profit and contribution; negotiating prices Nogotiting and 8 10 11 12 13 14 il Procurement and Supply Economic Factors The economic environment; the market mechanism; market structure; competition; macro-economic factors Objectives and Variables Defining issues and variables; setting objectives for negotiation; positions and interests; ‘openings and presenting issues; protocols and process issues Resourcing the Process Resources for negotiation; the venue; the participants; virtuel meeting options Stages of Negotiation Stages of negotiation; planning and preparation; opening; testing and proposing; bargaining: agreement and closure Influencing and Persuasion Influencing and persuasion; methods of persuasion; influencing tactics; behavioural technologies; ethical influencing Communication Skills for Negotiation Behaviours of skilled negotiators; interpersonal and communication skills; effective listening; Using questions; non-verbal communication; the influence of culture Developing Negotiation Performance Reflecting on negotiation performance; opportunities for improvement and development; ost-negotiation relationship management Subject Index 123 241 153 163 173 195 213 223 Preface Welcome to your new Study Pack. For each subject you have to study, your Study Pack consists of two elements, + ACourse Book (the current volume). This provides detailed coverage of all topics specified in the unit content. + Asmallformat volume of Revision Notes. Use your Revision Notes in the weeks leading up to your exam. For full explanation of how to use your new Study Pack, turn now to page xi, And good luck in your exams! Anote on style Throughout your Study Packs you will find that we use the masculine form of personal pronouns. This convention is adopted purely for the sake of stylistic convenience — we just don't like saying ‘he/she’ all the time. Please don’t think this reflects any kind of bias or prejudice September 2012 Negotiating and Contratingin Procurement snd Supply The Unit Content ‘The unit content is reproduced below, together with reference to the chapter in this Course Book where each topic is covered. Ui purpose and aims On completion of this unit, candidates ill be able to: Identify approaches to achieve negotiated agreements with external organisations © Recognise the use of legal terms that should regulate commercial agreements. The creation of formalised agreements is a critical part of the work of personnel in procurement and supply. This unit analyses approaches to the negotiation of agreements made with external parties and the formation of legally binding contracts. After contracts have been entered into, there can be conflict over performance issues and on costs, timing and quality of supplies. This should involve negotiation to achieve required outcomes. Learning outcomes, assessment criteria and indicative content Chapter 1.0 Understand the legal issues that relate to the formation of contracts Explain the documentation that can comprise a commercial agreement for the supply of goods and services * Invitation to tender or request for quotation 1 + Specification 1 + Key performance indicators (KPIs) 1 + Contractual terms x + Pricing and other schedules (such as for health and safety records, details of suppliers’ staff, use of subcontractors, non-disclosure/confidentiality agreements) 1 ‘Assess the legal issues that relate to the creation of commercial agreements with customers or suppliers + Invitations to treat or invitations to negotiate 2 + Rules relating to offer and acceptance, consideration, intention to create legal relations and capacity to contract 2 + The battle of the forms and precedence of contract terms 2 + Risks presented by contracting on suppliers’ terms or through oral contracts, 2 + The Vienna Convention on the International Sales of Goods 2 + Misrepresentations made pre-contract award 2 Explain the main types of contractual agreements made between customers and suppliers + One off purchases + Framework arrangements and agreements * The use of mini-competitions + Callofts + Services contracts * Contracts for the hire and leasing of assets egciatig ard Contraction in Pecuement and Suppty 2.0 Understand the main approaches in the negotiation of commercial agreements with external organisations Analyse the application of commercial negotiations in the work of procurement and supply Definitions of commercial negotiation Negotiation in relation to the stages of the sourcing process Sources of conflict that can arise in the work of procurement and supply ‘+ Team management and the influence of stakeholders in negotiation Compare the types of approaches that can be pursued in commercial negotiations ‘+ Win-win integrative approaches to negotiations ‘+ Win-lose distributive approaches to negotiation ‘+ Lose-lose approaches in negotiations * Setting targets and creating a best alternative to a negotiated agreement (BATNA) Explain how the balance of power in commercial negotiations can affect outcomes * The importance of power in commercial negotiations * Sources of personal power * Organisational power: comparing the relative power of purchasers and suppliers * How suppliers gather information on purchasing organisations ‘How purchasers can improve leverage with suppliers Analyse the different types of relationships that impact on commercial negotiations, ‘+ The relationship spectrum ‘+ Building relationships based on reputation, trust and justice © Repairing a relationship Understand how to prepare for negotiations with external organisations Evaluate costs and prices in commercial negotiations ‘+ Types of costs: direct and indirect, variable and fixed ‘+ Break even analysis: cost volume profit formulae + Costing methods such as absorption, marginal or variable and activity based costing * Volumes, margins and mark-ups and their impact on pricing * Negotiating prices Explain the economic factors that impact on commercial negotiations + The impact of micro-economics and the types of markets on commercial negotiations + Macro-economics and its influence on commercial negotiations * Sources of information on micro and macro economics Explain the main variables that can be used in a commercial negotiation ‘+ Setting objectives and defining the variables for commercial negotiation +The bargaining mix * Positions and interests * Openings and presenting issues Chapter Baaaa Dunn wads wove Chapter Analyse the resources required for @ negotiation + Choice of location * Involving appropriate colleagues Use of telephone, teleconferencing or web-based meetings © Room layout and surroundings Understand how commercial negotiations should be undertaken Explain the stages of @ commercial negotiation + Defining the stages of a negotiation such as preparation, opening, testing, proposing, bargaining, agreement and closure «How behaviours should change during the different stages of a negotiation Evaluate the main methods that can influence the achievernent of desired outcomes +The use of persuasion methods + The use of tactics to influence the other party Evaluate the main communication skills that help achieve desired outcomes + Types of questions * Effective listening ‘© Push and pull behaviours + Non-verbal communication © The influence of culture in commercial negotiations Explain how to analyse the process and outcomes of the negotiations to inform future practice ‘= Reflecting on performance + Opportunities for improvement and development ‘+ Protecting relationships after the negotiation 10 10 10 n 1 2 2 1B 2B B B 16 14 ‘nagotating anc Contracting in Procurement and Supply How to Use Your Study Pack Organising your study ‘Organising’ is the key word: unless you are a very exceptional student, you will find a haphazard approach is insufficient, particularly if you are having to combine study with the demands of a full-time job. A good starting point is to timetable your studies, in broad terms, between now and the date of the examination. How many subjects are you attempting? How many chapters are there in the Course Book for each subject? Now do the sums: how many days/weeks do you have for each chapter to be studied? Remember: + Not every week can be regarded as a study week — you may be going on holiday, for example, or there may be weeks when the demands of your job are particularly heavy. IF these can be foreseen, you should allow for them in your timetabling. * You also need a period leading up to the exam in which you will revise and practise what you have learned. Once you have done the calculations, make a week by-week timetable for yourself for each paper, allowing for study and revision of the entire unit content between now and the date of the exams. Getting started Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period each day. Getting into a routine helps avoid wasting time. Make sure you have all the materials you need before you begin —keep interruptions to a minimum. Using the Course Book You should refer to the Course Book to the extent that you need it. Ifyou are a newcomer to the subject, you will probably need to read through the Course Book quite thoroughly. This will be the case for most students. + Ifsome areas are already familiar to you ~ either through earlier studies or through your practical work experience — you may choose to skip sections of the Course Book. The content of the Course Book This Course Book has been designed to give detailed coverage of every topic in the unit content. As you will see from pages vit-ix, each topic mentioned in the unit content is dealt with in a chapter of the Course Book. For the ‘most part the ordler of the Course Book follows the order of the unit content closely, though departures from this Principle have occasionally been made in the interest of a logical learning order. Each chapter begins with a reference to the learning objectives and unit content to be covered in the chapter, Each chapter is divided into sections, listed in the introduction to the chapter, and for the most part being actual ‘captions from the unit content, Allof this enables you to monitor your progress through the unit content very easily and provides reassurance ‘that you are tackling every subject that is examinable. Negotiating and Cortectingin Procurement and Supoly Each chapter contains the following features. * Introduction, setting out the main topics to be covered * Clear coverage of each topic in a concise and approachable format = Achapter summary + Selfttest questions The study phase For each chapter you should begin by glancing at the main headings (listed at the start of the chapter). Then read fairly rapidly through the body of the text to absorb the main points. if it’s there in the text, you can be sure it’s there for a reason, s0 try not to skip unless the topic is one you are familiar with already. Then return to the beginning of the chapter to start a more careful reading, You may want to take brief notes as You go along, but bear in mind that you already have your Revision Notes ~ there is no point in duplicating what you can find there. Test your recall and understanding of the material by attempting the self-test questions. These are accompar by cross-references to paragraphs where you can check your answers and refresh your memory. The revision phase Your approach to revision should be methodical and you should aim to tackle each main area of the unit content in turn. Begin by reading your Revision Notes. Check back to your Course Book if there are areas where you cannot recall the subject matter clearly, Then do some question practice. The CIPS website contains many past exam ‘questions, You should aim to identify those that are suitable for the unit you are studying, Additional reading Your Study Pack provides you with the kay information needed for each module but CIPS strongly advocates reading as widely as possible to augment and reinforce your understanding. CIPS produces an official reading list of books, which can be downloaded from the bookshop area of the CIPS website. To help you, we have identified two essential textbooks for this subject. We recommend that you read these for additional information. The essential textbooks for this unit are Purchasing and Supply Chain Management by Kenneth Lysons and Brian Farrington and Essentials of Negotiation by Roy J Lewicki, David M Saunders and Bruce Barry, CHAPTER 1 Developing Commercial Agreements Assessment criteria and indicative content Explain the documentation that can comprise a commercial agreement for the supply of goods or services + Invitation to tender or request for quotation + Specification © Key performance indicators (KPIs) © Contractual terms + Pricing and other schedules (such as for health and safety records, details of suppliers’ staff, use of subcontractors, non-disclosure/confidentiality agreements) Section headings 1 Commercial agreements 2 Quotation and tender documents 3 Specifications 4 Key performance indicators (KPIs) 5 Contractual terms and schedules Introduction at 12 ‘The first section of the syllabus is concerned with the nature of commercial agreements for the supply of goods and services; the processes and documentation by which they are formed; and the legal issues surrounding them. Other units in your CIPS studies cover the development and interpretation of the content of contracts: for example, the source, meaning and effect of various contractual terms, The focus in this module is on the contracting and negotiation process: how offers are made and accepted; how negotiations and exchanges of documents can pose risks to the validity of the contract, or the interests of ‘the buyer ~ and so on In this chapter we start by examining the various documents that may be used to define the buyer's requirements in sourcing goods and services: what is to be supplied or performed, and on what terms and conditions. This is the basis for a legally binding commercial agreement or contract —as we will see in Chapter2. Commercial agreements Contracts are 2 central feature of everyday life. The purchase of a study book, the boarding of a bus, the ordering of a meal in a restaurant: all constitute contracts. A contract is simply an agreement between two (or more) parties which is intended to be enforceable by law. The “legally binding’ aspect makes a contract different from a social agreement, such as arranging to borrow a friend’ car for the day. in the latter case, if one party does not carry out his part, he will not be taken to court by the other to enforce the agreement. If the agreement is between two commercial Negoioting end Contracting in Procurement and Supaiy 13 14 15 16 enterprises, however, itis presumed that there is an intention to ‘enter into legal relations’: that is, to use the law to enforce the agreement if necessary. The law of contract is concerned with four basic questions. * Js there a contract in existence? The answer depends on the presence of five essential elements, which are discussed in detail in Chapter 2, but the fundamental requirement is for there to be a clear ‘mutually understood ‘agreement’ between the parties, in the form of an offer and an acceptance + Isthe agreement one which the low should recognise and enforce? Some contracts will be wholly or partly invalid or unenforceable, because of undermining (or ‘vtiating’) factors such as a mistake or ‘misunderstanding in what a party thought it was agreeing to * When do the obligations of the parties come to an end? The most common method of terminating @ contract is when both parties have performed their agreed obligations to mutual satisfaction: the contract has been fulfilled. However, contracts can also be terminated by the failure of one or both Parties to meet an essential term of the contract (‘breach of contract’) * What remedies are available for the injured party if the other party fails to meet its contractual obligations? Possible remedies include the right to terminate all obligations under the contract (eg te refuse to pay for faulty goods) and monetary compensation for loss suffered as a result of the failure (damages) In the ‘offer and acceptance’ at the heart of a contract: * The ‘offer’ may be the seller’s offer to sell (eg in the case of a tender bid or quotation, for examplel, which is accepted by the buyer to establish an agreement + The ‘offer’ may be the buyer's offer to buy (eg in the case of an auction bid, for example), which the seller accepts in order to establish an agreement. Im either case, it should be clear that a key requirement for a valic| and workable commercial agreement is the clear statement and accurate alignment of: ‘+ Exactly what the buyer wants (in terms of goods and services — and how, when, at what cost and to what level of quality they will be supplied) ond * What the supplier is offering, or agrees to supply. Defining and communicating the buyer's requirements, in such a way as to support a clear and ‘unambiguous agreement, is therefore the basis for an effective commercial contract, Several different

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