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PURCHASING MANAGEMENT

Introduction:
Purchasing is a function of procuring goods & services from sources external to the organization Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.

Purchasing, a branch of Logistics is a business term meaning buying raw materials and other necessary commodities for manufacturing products. It's an operational field in large-scale businesses, where a purchasing department led by a purchasing manager is set up to conduct the business efficiently. It also refers to the department of procurement, which carries out the task of releasing purchase orders for goods. In India, purchasing is directly linked up with supply chain management, transportation, distribution, manufacturing, production and procurement.

Definition: purchasing the acquisition of goods and services needed to support the various activities of an organization, at the optimum cost and from reliable suppliers. Purchasing involves defining the need for goods and services; identifying and comparing available supplies and suppliers; negotiating terms for price, quantity, and delivery; agreeing contracts and placing orders; receiving and accepting delivery; and authorizing the payment for goods and services.

People
Merchant Buyerswholesalers and retailers who purchase for resale.

Industrial Buyerspurchase raw materials for conversion, services, capital equipment, & MRO supplies.

The Role of Purchasing in an Organization


The primary goals of purchasing are: 1. Ensure uninterrupted flows of raw materials at the lowest total cost, 2. Improve quality of the finished goods produced, and 3. Optimize customer satisfaction. Purchasing contributes to these objectives by: Actively seeking better materials and reliable suppliers, Work closely with strategic suppliers to improve quality materials, and Involving suppliers and purchasing personnel in new product design and development efforts.

Responsibilities of Purchase Department:


(A) Exclusive Responsibilities: Selecting Right Suppliers Obtaining materials at best prices Placing PO with suppliers. Follow up with suppliers for prompt delivery. Developing & maintaining good relations with suppliers. Enquiring into complaints both from suppliers and user department.

Selecting the right managers and staff for the purchasing function. Giving training to the personnel to improve their effectiveness & efficiency. Market research for purchasing.

(B) Shared Responsibilities: Obtaining technical information & advice on materials. Establishing & developing specifications for materials. Scheduling orders for materials on suppliers & fixing delivery dates for supplies. Specifying modes of delivery & transportation Inspecting materials received.

Accounting of materials purchased, including payment of bills. Inventory Control Receiving, store keeping & warehousing Sale of scrap & surplus Transportation of materials including clearing of goods. Determining whether to make or buy

PURCHASING PROCESS
In a large industrial establishment a separate department namely purchase department is generally maintained. In small concerns the owner/manager makes all the purchases and dispenses with the need for a purchasing department. Purchasing cycle will have certain steps in the process of initiating and completing the transaction .

Manual/Traditional Purchasing Process


Manual Purchasing-Older system, prone to duplication of effort and error Step 1-Material Requisition/Purchase Requisitionstating product, quantity, and delivery due date are clearly. Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ). Step 3- The Purchase Order (PO)- The purchase order is the buyers offer & becomes a binding contract when accepted by supplier.

Traditional Purchasing Process


Customer
Purchase Order Receivables Report Accounts Payable Reconcile Mail

Supplier
Order Processing Packing List Invoice Mail Accounts Receivable

Receiving Dock
Mail

Check

Electronic Purchasing Process


Electronic Procurement (e-Procurement)

Step 1- Material user inputs a materials requisitionrelevant information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically). Step 3- Buyer assigns qualified suppliers to bidProduct description, closing date, & conditions are given. Step 4- Buyer reviews closed bids & selects a supplier

Advantages for the e-Procurement System


Time savings Cost savings Accuracy Real time Mobility Track ability Management Benefits to the suppliers

ELEMENTS OF PURCHASE CYCLE Establishing the need for procurement. Scrutiny of Purchase Indent. Market Research Order Preparation Follow Up Receiving and Inspection Acceptance of Purchase order is obtained from supplier or Order Acknowledgement Follow up by the purchasing department Checking the invoice and approving it

1. ESTABLISHING THE NEED FOR PROCUREMENT: Recognizing the need for procurement Determining the requirements Spelling out the specifications Communicating requirements to purchase (a) Purchase indent/Bill of Material (prod items) (b) Purchase indent (other items)

It is the need that is officially brought to the attention of purchasing department Purchase requisition describes the needed item and becomes the basis for action by purchasing department. Requisitions are signed by authorized individuals to avoid irresponsible purchase request A Bill of Materials is a list of all items incorporated into a finished product that the company produces. Under the method of establishing need, the PD is notified of the manufacturing schedule by Production Planning and Control (PPC) Department

2. SCRUTINY OF PURCHASE INDENT: Completeness of description Appropriateness of request Routing of indent through stores Logging of indents into indent register

3. MARKET RESEARCH: Telephonic Quotations Written Quotations Scheduled buying Source selection & Source Development

After a source had been recognized and described the PD proceeds to select the source of supply. The PD will have a list of Regular Approved Suppliers called Register of Suppliers A right supplier is the one who delivers the materials of correct specifications on the speculated delivery dates There are two sources for the selection of supply of materials Single source Multiple source

Single source The supplier may be exclusive owner for the supply of materials The supplier may be so outstanding in the quality of the product Concentrating purchases may make possible discount rates When all the orders are placed with one supplier deliveries may be more easily scheduled Long term relationships with suppliers encourages loyalty and reduces the risk and interruption in the supply

Multiple Sources

Assurance of supply is increased since fire, breakdowns or similar accidents occur to any supplier, deliveries can be still be obtained from the others Some companies diversify their purchases because they do not want to become the support of the company Assigning orders to several suppliers gives company a greater degree of flexibility

4. ORDER PREPARATION:
Scrutiny of quotations Negotiations Placing orders on suppliers Obtaining suppliers acceptance of purchase order.

This is to secure the price for items to be purchased. This can be accomplished in three ways Standard items Negotiation Inviting tenders Standard items: Vendors catalogues and price lists are available and for each items buyer need only to check current stocking to obtain the price

Negotiation implies bargaining between buyer and

seller
Inviting Tenders / Quotations: Inviting tenders is a must

in government undertakings
Placing the Order

The legal order is placed with the supplier on a form known as PURCHASE ORDER
Order Acknowledgement

Some companies insist on order acknowledgement from the supplier, acknowledging the receipt of Purchase order and agreeing to supply the items

5. FOLLOW-UP:
Pre-delivery follow-up Shortage chasing (a) Reminders (b) Personal visits (C) Telephones/telegrams (d) Faxes (e) Posting of personnel at suppliers works. Follow up is done to ensure that the items ordered are delivered by the supplier on time. Extension of Delivery Period If the suppliers are not effective within two weeks after the delivery date or if the supplier ask for extension of time, the attention of the authority who signed the order shall be drawn

6. RECEIVING & INSPECTION: Receiving dispatch details and logging them into the consignment register. Collection of material from transporters godown. Inspection for physical damages to the packages & number of packages Entering consignment details into Goods RR register. Uncrating of goods

Quantity certification Raising of GRR Inspection of goods. Cancellation of Orders and imposition of penalties in case of errors or not adhering to the terms of PO.

Checking the Invoice and Approval

The bill sent by the supplier is compared with the Purchase Order and Goods received. Note is made when the material is received. If the bill is correct it is approved and given to accounting department for payment

7. STORAGE & RECORD KEEPING: Movement of materials to concerned store /rejection store. Quantity certification Application of protective coating/marking Storage of materials into appropriate racks Posting of receipt into stock card.

8. INVOICING AND PAYMENT: Receiving GRRs in Accounts Department Receiving supplier bills. Linking of GRR and supplier bill Posting of purchase register Passing of bill Effecting payments

OBJECTIVES - PURCHASING
To avail materials at minimum possible costs increases productivity and resultant profitability of operations. To ensure continuous flow of production. To increase asset turnover investments in fixed assets and inventories are kept at minimum in relation to corresponding sales. To develop alternate sources of supply

To establish and maintain good relations with suppliers. To achieve maximum integration with other departments: 1) Production dept material specification, suggested supplies, items. 2) Engineering dept purchase of tools, machines, equipment 3) Marketing dept sales forecast for procurement of materials.

4) Finance dept meeting working capital needs, scheduling investments in capital assets. 5) Personnel dept manning and developing the purchase personnel. To train and develop the personnel. To maintain record keeping efficiently. To inform management about:
Volume & value of raw materials, suppliers, spares, components, machines, equipment,etc

Department cost of purchase dept Analysis of work performed Information about cash and quantity discount earned and lost Price trends and foreseeable future and its impact. Material availability and development strategies to be adopted New materials and processes which may reduce the manufacturing costs. Exploration of new sources of supply.

Purchasing: Centralized vs. Decentralized


Purchasing Organization dependent on many factors, such as market conditions & types of materials required. Centralized Purchasing- purchasing department located at the firms corporate office makes all the purchasing decisions.

Decentralized Purchasingindividual, local purchasing departments, such as plant level, make their own purchasing decisions.

Centralized vs. Decentralized Purchasing


Centralized: is a method of procurement of all types of materials, supplies, equipment through a single department under the direct control and supervision of one responsible person. Decentralized: when the regional or branch departments are allowed to buy material from the local market.

Purchasing: Centralized vs. Decentralized


Advantages- Centralization
Concentrated volumeleveraging purchase volume Avoid duplication Specialization Lower transportation costs No competition within units Common supply base

AdvantagesDecentralization
Closer knowledge of requirements Local sourcing Less bureaucracy

A hybrid purchasing organization- both decentralized at the corporate level and centralized at the business unit level may be warranted.

Advantages of Centralized purchasing


Duplication efforts in buying function is eliminated. Individual departments are relieved from the responsibility of purchasing their own requirements. Bulk buying strengthens the bargaining position of the buyer. Direct contact with suppliers which helps develop and maintain good relations.

Reduce inventory carrying costs as different regions/branches do not maintain inventory at their level. Transport economies of scale as large consolidated orders are received. Order processing, receiving, inspection costs are reduced due to few orders with large quantities. Responsibility of wrong decisions lies with the centralized dept. Materials can be adjusted easily i.e. scarce materials can be allocated to branches first.

Disadvantages of Centralized purchasing


Individual items specific requirements may not be attended successfully. Delays in receiving of materials. Centralized buying staff may not be qualified or experts. Local resources may not be tapped thus losing out on cost advantages.

Specialized Purchasing Procedures


Material requirements are broadly classified into 2 types: Direct materials Maintenance, repair and operating materials. The above differ substantially and thus their procurement efforts need distinct treatment.

Purchasing procedure normally deals with the purchase of direct materials while specialized purchasing procedures describes the procurement of indirect materials such as stores and supplies. The specialized purchasing procedures are employed in buying the standardized indirect materials such as stores and supplies:

Blanket order Stockless buying Systems contracting Small order purchases Tender System

Blanket orders
Standing order with the supplier to supply the materials according to the requirement of the buyer. Deliveries are scattered over the contractual period. This procedure is advisable for materials of low value but having a high annual usage where the usage cannot be planned precisely. For e.g. stationery items.

Stockless Purchasing
Buyer is not required to maintain the stock of these items. Onus of stock maintenance lies with the supplier. The supplier locates the materials at his own plant if he is close by to the buyer OR the materials are located at the buyers plant if supplier is located at a far distance. For e.g. aviation fuel pumps at airport, petrol pumps in transport undertakings, tyre godown near automobile manufacturing units.

System Contracting
It incorporates the characteristics of blanket order and stockless buying however still it differs. A long term contract is made and the buyer is not required to maintain the safety stock. Seller effectively becomes the material planner for the buyer. Regularly consumed low value items are system contracted. For e.g. office equipment, air conditioners.

Small Order Purchases


Purchase of Items of non-recurring nature which involve very insignificant costs. Items are available from some corner supplier. Not stocked for future needs. Cost of materials does not justify the paper cost of purchasing No formal purchasing procedure is followed. Also known as paperless purchasing. Popular methods are:

1) Purchases under petty cash system where indirect cash purchases are for small items. 2) Purchasing through telephone orders where no formal purchase orders are sent to suppliers. 3) Purchasing under the COD system. The cost of order placing, invoicing and account processing is reduced substantially.

Purchasing Tender System


To procure materials at the most competitive rates and to eliminate chances of undue favor to any supplier. The main objective is to give opportunity to all vendors. Normally adopted by most government and public sector undertakings. Private sector adopts this method where the item values are very high. The disadvantage is the longer lead time for order placing and unknown bidders who may quote low. For e.g. buying a new computer system, manufacturing machinery, or outsourcing a maintenance contract

SUPPLIER SELECTION
Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment. Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base. Preferred suppliers provide:
Early supplier involvement- Information on the latest trends in materials, processes, or designs Information on the supply market Capacity for meeting unexpected demand Cost efficiency due to economies of scale

The process of selecting suppliers, is complex and should be based on multiple criteria:

Product and process technologies Willingness to share technologies and information Quality Cost Reliability

Order System and cycle time Capacity Communication capability Location Service

How Many Suppliers to Use


Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.

Reasons Favoring a Single Supplier


To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split

Reasons Favoring More than One Supplier Need capacity Spread risk of supply interruption Create competition Information Dealing with special kinds of business

QUALITY
Purchasing and quality share responsibility for the qualification and monitoring of suppliers and their supplies. Suppliers capability can be evaluated through supplier self-surveys, on-site audits and interim review of suppliers quality system. Suppliers performance rating system and a monthly performance report is generated to monitor quality and delivery performance of suppliers continuously.

Approved supplier list is maintained which is updated on a regular basis. All qualification documentation and performance records of each supplier is maintained in records. All quality disputes shall be resolved through inspection and testing methods. Disputes involving rejection of materials from a supplier shall be documented.

NEGOTIATION SKILLS

My father said: "You must never try to make all the money that's in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won't have many deals.
J. Paul Getty

Why Negotiate?
Gavin Kennedy in his book The New Negotiating Edge says..

Animals do not negotiate. They use violence or the threat of violence to get what they want, whether it be food, a mate or territory. Have you ever seen 2 dogs negotiate over a bone?

Trade is the human foundation of human civilisation. It is what makes humans different from animals.
Negotiation is anathema to tyrants, who usually want something for nothing and do not recognise a need for another persons voluntary consent before they get what they want

Negotiation What is it?


The process by which we search for the terms to obtain what we want from somebody who wants something from us

Negotiation is an explicit voluntary traded exchange between people who want something from each other
Gavin Kennedy

Gavin Kennedy

To negotiate is to trade something we have for something we want.


Anon

Confer with others to reach a compromise or agreement.


Concise Oxford Dictionary

Some decision making tools for negotiation:


Persuasion: Usually the first method we choose when we want something. Useful when interests or opinions are the same.
This is not the easy way out, and sometimes its just not worth continuing if the cost (in any terms) is too high. This could simply be stating your options, I could take my business elsewhere. It could also be gentle reminders or unspecified consequences right up to threats. Threats are not useful in a negotiation situation as they erupt in full blown battles. Works well when both parties have a strong relationship, where you trust each other, and share the problem.

Giving in:

Coercion:

Problem Solving:

When do we Negotiate?
When we need someones consent
When the time and effort of negotiating are justified When the outcome is uncertain
.

Negotiating Behaviour
3 types of behaviour that we can display and encounter when in a negotiating situation RED BLUE PURPLE

RED Behaviour
Manipulation
Aggressive Intimidation

Exploitation
Always seeking the best for you No concern for person you are negotiating with

Taking
People behave in this manner when they fear exploitation by the other party, but by behaving this way to protect themselves, they provoke the behaviour they are trying to avoid.

BLUE Behaviour
Win win approach Cooperation Trusting Pacifying Relational Giving

This is behavioural dilemma - do you cooperate (blue) or defect (red)? Can you trust the other person? And to what extent? Trusting someone involves risk, on the one hand being too trusting is nave and on the other, not trusting at all can create deceitful behaviour. The answer is to merge blue and red behaviour into purple.

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PURPLE Behaviour
Give me some of what I want (red) Ill give you some of what you want (blue) Deal with people as they are not how you think they are Good intentions Two way exchange Purple behaviour incites purple behaviour Tit for tat strategies Open People know where they stand Determination to solve problems by both sets of criteria of the merits of the case and/or the terms of a negotiated exchange

To the red behaviourist the message is loud and clear, You will get nothing from me unless and until I get something from you.

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The Four Phases of Negotiation


BARGAIN
PROPOSE DEBATE PLAN

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PLAN
When you have no time to prepare for a negotiation, do you: a. Rely on your experience of similar situations? b. React to what the other person has said? c. Listen to them and adjourn at the first opportunity?

a.

b. c.

This might be tempting on the grounds that it is all you have time for and could become a habit of this is how you prepare for all other negotiations even when you do have time. This is the limit of preparation for some people, and is a sign of reactive management. The best response. If are thrown in the deep end and do not have any preparation time.

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PLAN
You are depending on winning a contract and are the preferred bidder. A problem has come up that could jeopardise your preferred bidder status and therefore winning the contract. Do you: a. Ensure that the clients interests take precedence over yours? b. Put your interests before those of the client? c. Judge the importance of each partys interest on their merits? a. Most likely to be necessary if you do not meet the clients interest you are unlikely to remain the preferred bidder. b. Not a sensible option. If you put your interests first, she doesnt get what she wants and therefore will not give you what you want. c. Address the other party interest first. You cannot compare the merits of each partys interest.

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PLAN
What do I want? What do they want? Try to judge the objective they will want, what arguments are they going to use to support their objective and how will you counter them? What will/can I trade? Explore all the available options of the trade Explore long and short term implications of each option for all parties involved Set objectives in terms of acceptable limits and that you have a realistic chance of achieving. Visualise possible gains, not losses. Be aware that the opposition might have a hidden agenda

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PLAN
Identify your supporting arguments that justify your objectives and the arguments that the other party may use against them. How will you counter their arguments? What strengths and weaknesses do you take to the negotiating table? How can you maximise your strengths and minimise your weaknesses? What are the strengths and weaknesses of the other party? What will be your opening gambit and how will you present it? Timescale how much time is there to negotiate how imperative are deadlines? What will be your opening position, your fall back position and your final fall back position beyond which you will refuse to do business.

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DEBATE
You are negotiating with a colleague over parking spaces for your teams, and he makes a factually incorrect statement about your entitlement to parking places. Do you: a. Stop him right there to correct the error? b. Shake your head vigorously, indicating disagreement but say nothing until he finishes or gives way? c. Say and do nothing until he is finished? a. Nobody likes being interrupted and it does not help if a negotiator does so. b. Body Language that is visually interruptive is still an interruption. c. Yes. If the case is built on the factual error it will disintegrate more quickly if you wait to reveal the truth.

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DEBATE
The other negotiator is quite angry and winds up her tirade of a clear threat of what she will do if she does not get her way. Do you: a. Ignore her threats and concentrate on rebutting her claims? b. Demand that she withdraw her threat if you are to continue negotiating? c. Counter her threat with one of your own? a. Better to ignore the threats. b. Its pointless, and unlikely she will withdraw. c. No. This could spark of a cycle and end up in a fight.

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DEBATE
The other negotiator makes a statement with which you profoundly disagree. Do you: a. Tell him that he is mistaken and explain why? b. Ask him why he believes that his statement is true?

a. He wont listen. He will be constructing his counter argument. b. Yes. The best way to handle disagreement is to question the person with whom you disagree.

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DEBATE
Positive Powerful opening confident body language, tone and words Break the ice and discuss neutral topics and build rapport Cover: Why we are here, what we are going to do, how long it will take Emphasise the need for agreement at the outset

Listen to what the other party say and how they say it
Observe non-verbal signals Sit where you can see everyone If you are with one other person sit apart so you are 2 voices.

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DEBATE
Positive Powerful opening confident body language, tone and words Break the ice and discuss neutral topics and build rapport Cover: Why we are here, what we are going to do, how long it will take Emphasise the need for agreement at the outset

Listen to what the other party say and how they say it
Observe non-verbal signals Sit where you can see everyone If you are with one other person sit apart so you are 2 voices.

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DEBATE
Give your general views on the broad field to be covered. Look together at the possibilities for joint advantage emphasise areas of agreement Never pass over something you dont completely understand. Dont feel intimidated both sides are under pressure. The person under the greatest time pressure loses so dont reveal your deadlines. Exchange information through statements. Explain and explore the differences that prompt the search for a negotiated solution.

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DEBATE
Deliver the statements in a neutral tone. Deliver it in a hostile tone and you can predict the effect and response.

Reinforce your tone with your behaviours. You want a solution to meet both parties needs.
Give assurance, i.e. you are in the solution business, and any current difficulties are problems to be jointly overcome. Disclaim any intention of acting negatively towards the other party. Use questions to elicit information not to fuel argument. Questioning is an important negotiating skill, and demonstrates your willingness to understand the other negotiators interests Actively listen, dont pretend to listen and dont wait to speak give the speaker your full attention. Summarise their views to their satisfaction to demonstrate you have understood.

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PROPOSE
A union leader interviewed on television made a passionate case that if only the management would return to the negotiation table and show some flexibility, he had no doubt that the bitter strike would be settled in a matter of hours. Did he mean that: a) The union was ready to make some concessions? b) The management must make some concessions? c) If the management made some concessions then the union would too? a) Unlikely. The union has to keep the spirits of its members high and show they are doing their best to find a settlement. Usually they mean what they say, the return to work is conditional on the management showing some flexibility and conceding the unions claim. Yes. Unlikely. If movement was possible if reciprocated, the union would be unlikely to use a public forum.

b) c)

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PROPOSE
In an effort to conclude the negotiations, the seller offered to cut her prices by 10% and drop the pre-payment demand. Which statement would most likely achieve her objective? a) b) Ok. Well cut our prices by 10% but we must be paid after 30 days delivery If we drop our prices by 10% and allow 30 days credit, can you confirm the order of 1000 units? If you confirm the order of 1000 units, we will reduce prices by 10% and allow you 30 days credit Deceptively ok, except that it is an unconditional offer requiring nothing to be offered in return by the buyer. A free-gift concession, not a trade. A question-proposal which is weaker than a statement proposal Yes, much better. The bargain is conditional and the condition (demand for 1000 units) is stated first, followed by the offer (10% price cut and 30 days credit)

c)
a)

b) c)

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PROPOSE
Decide whether you will speak your proposal first or respond to the proposal from the other party. Put forward your proposal with as little emotion as possible. Leave room for manoeuvre in your proposal Full Disclosure really means 90%. You may not know or are unwilling to disclose 100% of your position. This can be very productive reaching out to the other party can be a strong positive behaviour builder, however, both parties must want to negotiate towards agreement.

Be assertive remember PURPLE. (Not RED or BLUE) Use If youThen I not If we will you this avoids a question proposal.

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Examples of Proposals
Submissive 1. How about we make it 10%? Assertive

2. No Problem.

3. I hope you can meet that deadline.

4. We were hoping to include a liquidated damages clause. 5. Itll be tough to meet that deadline but ok well give it a go

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Examples of Proposals
Submissive 1. How about we make it 10%? Assertive If you make it a 10% discount, then we will order in lots of 100,000.

2. No Problem.

If you pay our costs then we could consider uplifting it ourselves.

3. I hope you can meet that deadline.

If you meet that deadline then we can consider giving you the work

4. We were hoping to include a liquidated damages clause.

If you include a liquidated damages clause then you are eligible to be awarded the contract

5. Itll be tough to meet that deadline but ok well give it a go

If you pay our premium hourly overtime rates then well go for that deadline.

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PROPOSE
Avoid wish, hope, would like this is not assertive When you make and consider proposals it means you are moving towards a jointly agreed solution. Proposals consist of 2 elements: the condition plus the offer and can be best presented with the If .Then technique.

Both the condition and the offer can be couched vaguely. But it is better to state your condition first.
Example 1: If you change your terms of business, then I could consider some amendments to our payment schedule.

Is example 1: A. Vague-vague (vague in condition and offer) B. Specific-vague (specific in condition and vague in offer)

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PROPOSE
Answer: Vague-Vague. Vague in the condition and offer. The proposal isnt specific about the changes in the terms of business nor in what amendments could be made to the payment schedule.

Example 2: If you amended the penalty period from 14 to 7 days then I could consider some amendments to our payment schedule Is example 2: A. Vague-vague (vague in condition and offer) B. Specific-vague (specific in condition and vague in offer)

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PROPOSE
Answer: Specific-Vague. Specific in the condition, but vague in their offer.

Being vague in the offer is a sign of proposal.


It isnt an exact science and you dont have to follow a set pattern, but research shows that effective negotiators do move from vague to specific in their proposal. Being vague gives you some scope, as you dont know how near or far you are from the point of settlement, and prevents you from getting to a dead end. By being vague instant rejection and instant acceptance is not appropriate. How can you accept something that isnt specific? Conditions can be vague or specific. You can have specific proposals, but beware of being hasty.

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Responses to a Proposal
If you dont agree, avoid amateur dramatics, slamming the table, storming out etc. This is typical RED behaviour. PURPLE behaviour, means responding positively. Welcome the fact a proposal has been made, you dont have to agree with the content this is what you are around the negotiating table for, to improve on the initial proposal to achieve a mutually acceptable solution. If agreement is hard to find keep looking for a solution until one is found or, it is clear that one doesnt exist. You then have to either agree to disagree and call a halt to negotiations or, if the consequences or alternatives are not acceptable then negotiation has to continue.

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BARGAINING
How might the following proposals be amended to make them assertive? a) If we agreed to foreign rights, would you accept this on a licence-only basis? b) Your fee is slightly more than I was expecting, so could we pay it in monthly instalments? c) Would it be ok if we used our own transport? a) b) c) If you accepted this on a licence-only basis then we would agree to foreign rights If we pay in monthly instalments, then we might accept your fee. Would it be ok if we used our own transport?

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BARGAINING
How would you amend the following proposals into a bargain format? a) b) c) If you agree to some form of bonus, then we will raise the productivity by 5% If we secure and fence the site, will you expedite the purchase date by 90 days? If we receive assurances, then we will pay 100,000 against your outstanding debts. If you agree to a 20% bonus then we will raise productivity by 5%. If you expedite the purchase date by 90 days, then we will secure and fence the site. If we receive the appropriate assurances as detailed in our letter of 12 August, then we will pay 100,000 against your outstanding debts.

a) b)

c)

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BARGAINING
A bargain is the conclusion of the negotiation. In Scotland solicitors close a negotiation by announcing a bargain is concluded. Phrases like: So, what you are offering is Ok I get the picture Let me be clear, you want x for y Heres how I see it. To sum up, in return for x Ill agree to y Show that the two parties are moving towards each other and the negotiation is coming to agreement.

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BARGAINING
Be prepared to make concessions, offer the smallest concessions first you may not need to go any further. Compromise without losing face. If you have had to backtrack on a point you had as your final position you could say Since you have changed your position on I may be able to change mine on Make eye contact to emphasise that each concession is a serious loss for you. Do not ignore issues in order to speed up negotiations. Record fully all agreements finalised at the negotiations close.

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Closing the Negotiation


Summary Close Summarise the details of the conditions and the offer, and ask for agreement. Useful where there remains some small differences. It gives both parties time to consider the final agreement.

Adjournment Close

Final Final offer close

Make it clear that this is your final final offer by choosing the right words, tone and body language. Create an atmosphere of decisiveness, gather your papers together as though getting ready to leave.

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Dealing with Difficult Negotiators.


Intimidation Domineering Bullying Threats Focusing on their own interests and not yours

These are typical RED behaviours. Be careful to distinguish those who always behave in a RED way, to those who are just having a bad day.

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Dealing with Difficult Negotiators.


The man you are negotiating with has a bombastic and rude manner. He interrupts constantly and loudly and at a pace that does not allow interruptions to his flow. He is emphatic and threatening and shows no interest in your point of view. Do you: a. Retaliate in kind with matching behaviour? b. Wait for an opening to say your piece? c. Agree to what he wants.
a. Retaliation is a challenge. He is not intimidating you enough he will put on more pressure. Yes. But only if you are clear that his behaviour will not affect your focus on the outcome. Never! Do not give him the satisfaction, by giving into a bully and their intimidation.

b.
c.

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Dealing with Difficult Negotiators.


The financial director of a large customer is an abusive and domineering person, who has a repertoire of swear words and will not accept No for an answer. She expects you to sit there and take it and theatrically waves her arms about and throws papers around when she wants to make a point. Do you: a. Behave in a contrasting manner and keep your cool? b. Agree to what she wants? c. Wait to say your piece? a. b. c. To contrast her behaviour only shows her that her behaviour is working, shell put on more pressure until you give in. Never! Do not give in to her intimidation. Yes, but only if you are sure her behaviour will not affect the outcome.

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Dealing with Difficult Negotiators.


So what can you do about it?
Do not let their behaviour affect the outcome that is what they want. They know if they behave in this way they will get what they want because the other party will back down. Do not react to their behaviour- that is what they want. You need to ignore their behaviour, this is what they choose not you. Be focused on the outcome and do not let their behaviour influence you away from this.

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Dealing with Difficult Negotiators.


Focus on the merits of both cases Consider what trades you are going to make. What you give up reflects consideration of the merits of their case, in exchange for what you insist on getting from them. This shows and forces them to give recognition to the merits of your case. In short, continue with your PURPLE behaviour, using the condition and offer, If then strategy.

DO NOT LET THEM GET TO YOU!!

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Negotiation Check List


Good Practice
Actively listen Question for clarification Summarising Test commitment Seeking & giving information Encourage two way conversation State and plan your proposal then summarise Use the if you .then well principle

Avoid
Interrupting Attacking Blaming Talking too much Sarcasm Threats Taking it personally Closed body language

PURCHASING COSTS
Managing the cost of purchased goods and services continues to be one of he hottest issues in purchasing. A recent study indicated that, as a percentage of an organization's revenues, purchasing expenditures averaged 63 percent in manufacturing, 86 percent in wholesale, 78 percent in retail, and 86 percent in utility industries. Even in the general service sector, purchases amount to approximately 25 percent of total costs.

Simple Fact?
It is difficult to determine a single cost management tool or technique which can be used to manage purchasing costs: when the goal is boosting profits by dramatically lowering costs, a business should look first to what it buys.

Suggestions for reducing costs:


Leveraging your buying power Committing to a handful of suppliers Both buyers and sellers work together to reduce costs. However the above suggestions are not specific enough to help purchasers actually analyze the situations that they may face.

Approaches to cost management


Developing a framework for classifying purchases. Discussing which cost analysis techniques best support each classification in the framework. Focusing on strategic cost management techniques.

COST, PRICE AND DISCOUNTS


PRICE: It is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). COST: A specified sum of money required for an object or an action before it can be acquired or done.

DISCOUNT: A specific type of marketing promotion in which you invite shoppers to save money on specific products or product groups. DIFFERENCE B/W COST AND PRICE Price is commonly confused with the notion of cost as in "I paid a high cost for buying my new plasma television." Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the sellers investment (e.g., manufacturing expense) in the product being exchanged with a buyer.

Types of Pricing
Cost-based pricing : sellers offering price is derived directly from his cost price with a particular profit margin added. (mark-up pricing) Perceived value pricing: Price is based not on cost but on what the market can bear. For e.g. spare parts prices are often not directly related to the costs of the product but are usually related to what they are worth to the buyer in particular emergency situations.

Value Pricing: Customers are charged fairly low prices for high-quality offerings. For e.g. IKEA is known for value for money that it offers to consumers. Walmart attracts large masses of consumers through its every day low pricing strategy. As a result suppliers are consistently challenged to reduce operational costs and transfer the benefits to Wal-mart and its customers.

Going rate pricing: Price is based largely on competitor prices. A market leader is followed in setting prices. For e.g. fuel prices in many European countries. Auction type pricing: Suppliers may use auctions to dispose of excess inventories or used goods. It is used when buyers decide to go for tendering process. This can either be selective or public.

Types of Discounts
Cash Discount: offered directly on payment. Benefits acceleration of payments. Quantity Discount: To stimulate larger quantity orders. Buyers can realize a lower price per unit. Volume bonus: Are paid to the buyer at the end of the year based upon the total order volume, that actually has been made. Geographical discount: Given to buyers located close to suppliers factory or DC making transportation costs much lower than average. In this manner distant suppliers can be kept away.

Seasonal Discount: When buyer orders out of season, it will get a lower price. For e.g. dealers are stimulated to place orders in winter for bicycles after which delivery takes place in spring. In this way cycle manufacturers are able to evenly spread their production volumes throughout the year. Promotional Discount: Provided to temporarily stimulate the sale of a product or if it is a new product.

COST STRUCTURE
Buyers must know the suppliers: Material costs Direct labor costs Energy consumption Transportation & Distribution costs Indirect costs (general management overhead and sales costs)

GENERAL RULE..
The higher the share of fixed costs in the cost price of the end product, the greater the suppliers price elasticity. By expanding the order volume to the supplier, the buyer will be able to create a decrease in the fixed costs per unit, and this should result in lower price per unit.

Important terms to be understood


Purchase Requsition:

As part of an organization's internal financial controls, the accounting department may institute a purchase requisition process to help manage requests for purchases. Requests for the creation of purchase of goods and services are documented and routed for approval within the organization and then delivered to the accounting group. Purchase Order: A Purchase order is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed price for a products or services that a seller will provide to the buyer. Sending a PO to the supplier constitutes a legal offer to buy products or services.

Contd::
Bill of materials (BOM): is the term used to describe the "parts list" of components needed to complete a saleable end-item.BOMs are hierarchical in nature with the top level representing the sub-assembly or end-item. For example the end-item BOM for a Personal computer would list the computer, its major sub-assemblies (board, chassis, modem, keyboard, display, etc.) as well as additional materials needed for a complete saleable product -- shipping box, user manual, packaging, packaging labels, etc.

Contd::
Request for Proposals (RFP): Is a request made by the buyer to the seller for containing information necessary for prospective sellers/contractors to prepare proposals. In response to RFP, sellers submit their prices plus technical proposal spelling out how they will fulfill the need described in the RFP. (same is applicable for RFQ Request for Quote or IFB Invitation for bids)

CONCLUSION
Purchasing is more than just buying things at the right place and getting them in at the right time. Its a myth that one Euro saved on inputs is one Euro more net profit. Incorrect assumption that it is easier to reduce costs of inputs than to increase sales and thus cost cutting. Suppliers support is of utmost important if companies want to achieve their goals.

It is not just the company that serves the end-customer, it is the network of companies that together serve the customer. The worst supplier determines the image of the total set of companies and the brand name associated. Bullying suppliers because of temporarily cost cutting requirements may well result in loss of flexibility and agility because of lack of support when the company really needs that. (fire, urgent deliveries, wars, increased uncertainty, postponing deliveries, etc) Treat all suppliers as friends or partners and not squeeze them.