Tag archive: procurement-negotiation
Are You Looking For Your 2%?
I've found most business negotiations can produce, at a minimum, a 2-3% swing in the resulting outcome. This doesn't sound like much does it? Only a 2% difference in the sales price. Only a 2% difference in the cost of materials. Only a 2% difference in the the amount of time. Only a 2% difference in the engineering specifications, or quality, or . . . . .
When you are negotiating an agreement, pause for a moment, and quantify what a 2% difference would make. When you do I think you are in for a big surprise.
Of course every organization is different, but let's look at a few real examples of the impact this little 2% can make. I will use information from public corporations since their financial statements are readily available as pubic information.
First let's look at Hewlett Packard. What would be the impact of a 2% reduction in cost of goods sold (think of all the procurement/manufacturing/engineering negotiations)? The 2% would result in a 21.7% increase in net profits for Hewlett Packard. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 28.7% increase in net profits for Hewlett Packard. The total potential opportunity --- a 50.4% increase in Hewlett Packard's net profits!
What about the Boeing Corporation? What would be the impact of a 2% reduction in cost of goods sold (procurement/manufacturing/engineering negotiations)? The 2% would result in a 26.3% increase in net profits for Boeing. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 32.7% increase in net profits for Boeing. The total potential opportunity --- a 59% increase in net profits for the Boeing Corporation!
Look at Caterpillar. What would be the impact of a 2% reduction in cost of goods sold (procurement/manufacturing/engineering negotiations)? The 2% would result in an 18.4% increase in net profits for Caterpillar. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 25.4% increase in net profits for Caterpillar. The total potential opportunity --- a 43.8% increase in net profits for Caterpillar!
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As you can see, 2% makes a big difference! What about your negotiations? What about your company?
The next time you enter a negotiation, think about what that little 2% could do for your organization. What would be the impact on net profit? Make sure you understand what you might be giving away, or leaving on the negotiating table.
Once you approach your negotiations with a goal of searching for this little 2%, you will find you become more engaged with the other party; both of you will gain more information; and you will find opportunities that neither of you may have thought about before. There may be ways to create significantly more than the 2%. That's one of the secrets of true "BOTH-WIN" negotiating. But it all starts with the search for that little 2%.
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Guiding Standards, Rules and Regulations
Few things in negotiation carry as much weight as well-thought-out standards and norms. Negotiators who can back their position with objective standards take the high ground in a negotiation.
Cost standards lend legitimacy to the buyer who says to the seller, “We’ve got to buy it within my standard cost guidelines. This is all management has allocated for this part.” If the buyer shows the computer printout for standard costs to the salesperson, the bogey becomes doubly credible.
From the seller’s standpoint, standards can guide the buyer to a “yes” decision. The salesperson armed with standard price lists, standard terms and conditions, standard warranties and standard discounts holds the high ground. In a strange way, the seller’s standards make it easier for the buyer’s organization to accept the proposal offer.
Before going into your next negotiation, ask yourself whether there are any standards or norms that will help your viewpoint prevail. There probably are.
Another type of supporting backup for your position is guiding rules, regulations and laws. At one time or another, most of us have been kept from doing what we felt to be reasonable because some company policy or computer program prohibited us from deviating from its constraints. For example, there were many occasions when I, as a seller, had to provide the buyer with cost breakdowns I didn’t want to give. This cost information was submitted because government procurement regulations said I had to. If they represent your viewpoint, rules, regulations, policies, procedures, and laws make it easier for your position to prevail, but they can be a real problem if they work in favor of the other side.
From now on, put the power of legitimacy on your side. Before going into a negotiation, search for the high ground in your own company policies and procedures. Even better, see if there are government regulations, rules or statutes that support your position. These guides to action make it easier for the other party to say “yes.”
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Partnerships Will Change Selling Part Two
These seller-customer partnerships reached prominence in Japan in the past four decades. Now they are on the rise in the United States. This trend toward partnerships continues to accelerate and is profoundly affecting American business.
The time of “high-stakes shoot-outs” has arrived. In their search to be competitive in the world market, giant corporations strive to cut costs on everything they buy. For example, instead of each corporation division purchasing its own packaging products, the corporation with thirty divisions now prefers to buy packaging from one or two suppliers rather than thirty.
Each of these thirty suppliers once bid on million dollar orders from their local division customers. Now, world class packaging companies bid on $100 million contracts. They bid to satisfy the needs of all a corporation’s divisions in the United States as a single contract. Procurement contracts are not for one year as most used to be. Now they bind the parties for three to five years.
Negotiations in the world of partnering are different. They are concerned not only with price and service but also with the ability of the seller to do research, finance factories with special needs, design a wide variety of packaging, and reduce costs, improve quality, and enhance appearance over the contract period.
The result is predictable. Only five to ten firms are large enough to participate in this high-stakes, winner-take-all game. Local and regional firms cannot break in. To survive they must downsize to service small market niches or sell out to large corporations.
The “high-stakes shoot-out” is probably the most difficult selling problem now facing local and regional suppliers still in the marketplace. The cost of making a winning proposal has risen dramatically. The ability to meet the customer’s stringent partnership and volume needs has narrowed the field. Once an order is lost it will be lost for five years, perhaps forever.
Partnerships are changing the way sellers must sell. They are also changing the individual job description of the salesperson and the corporate buyer to whom they sell. Both will suddenly find themselves far more involved in the world of contract management and in the administration of continuous contract changes. Both will need to learn new and difficult skills.
Yet, with all its difficulties, partnering is worth the effort. When it is well done the payoff to seller and buyer is enormous.
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Job Titles Create Stereotypes
People at work and elsewhere have prejudices that serve to impede the flow of information between them. Among the worst barriers are those that take root in culture, race, religion or national origin. Much has been written elsewhere about these prejudices and their deleterious effects. Bad as they are, such prejudices are diminishing, to the benefit of all who value equal opportunity and free expression.
We will focus here on another, less recognized barrier to communication, and that is the attitudes and stereotypes people have about the jobs others do and the job titles associated with those jobs. We all know that people look up to some kinds of work and down on others. They tend to pay more attention and give greater consideration to those occupations held in higher regard. These hidden attitudes serve to distort the flow of ideas and therefore need to be addressed.
Unfortunately, it is the job titles that contribute in part to communication stereotypes and biases. The job titles people hold tend to elevate the influence of some co-workers and reduce the influence of others. In truth, what people think others do at work by virtue of their job title is usually far from what they really do. Job titles contribute to this disconnect.
I know someone in a high position on a major engineering project who thinks little of those who work in purchasing. In describing them, he says, “All they do is buy whatever and as much as they are told to buy.” Instead of finding out what purchasing executives actually do and what is difficult about their work, this engineer scoffs at it to everyone’s loss.
At project meetings he barely listens to what they say. He is wrong. I have worked with purchasing professionals in small and large corporations. Their job requires a high level of intelligence and business judgment. They engage in protracted and difficult negotiations over a wide spectrum of ideas, specifications and legal complexities. Supply management is a very important activity in most organizations. When those in supply and procurement speak, it’s wise to hear them out.
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Your Negotiation Today
You've probably noticed that the last two years have been difficult for many individuals and many organizations. As the recession winds down, new opportunities will emerge, both for you personally and for your organization. Your negotiating skills are more important than ever.
In 2010 make things happen versus permitting things to happen to you!
Negotiating is a fundamental skill all business professionals must refine to survive. Regardless of your position within your organization, you will be negotiating today, tomorrow and throughout 2010. First and foremost, make sure you protect your own interests and the interests of your organization. Strive to create more innovative, Both-Win outcomes in your negotiations. The value you can create with your own unique knowledge, resources, perceptions and approaches to your negotiations is something to be treasured. You can make a real impact in your organization.
Every day you negotiate something.
It does not matter if you are an engineer, a salesperson, a supply management or procurement professional, a manufacturing specialist, construction manger, contract manager, marketing manager, project manager, or any of a multitude of other executive and top level positions (yes even CEOs). Every day (every hour) you negotiate something (schedules, resources, designs, prices, costs, specifications, work hours, legal terms and conditions, land values, etc.).
I want to personally thank all of you that have attended the Karrass Effective Negotiating Seminar and wish you much success in 2010. You have the skills to insure your organization's success.
If there are business associates you work with, or negotiate with, that have not yet experienced the Karrass training, please let them know about Karrass. The more everyone knows about negotiation, the better the probability for success.We know after 40 years of training business professionals, with proper skills (which can be learned), all negotiators can produce better outcomes--sometimes exceptional outcomes.
Chester L. Karrass
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Wise Negotiations
Sales perspective:
Today’s economy makes deals harder to close and margins tighter. Buyers are tough today. It is never easy to make a sale, but now it is harder than any time in recent years. Now you really have to negotiate.
Buyer’s perspective:
Procurement and supply chain managers are under tremendous demands to reduce costs. A recent study by Purchasing Magazine indicates purchasing professionals today are more focused on cost-reduction strategies than on other issues such as supplier capacity, finances or consolidation of suppliers.
Results show 48% of buyers polled said negotiating lower prices for products and services with their suppliers is their biggest priority right now. Other supplier-facing priorities ranked in order of importance included supplier consolidations (15%), ensuring the financial health of suppliers (14%), getting suppliers more involved with product development (12%) and, lastly, ensuring suppliers have the capacity to ramp up production when the economy recovers (11%).
Cost Savings Example:
Consider this example which illustrates the true business impact of negotiating better pricing from suppliers.
In 2008 ABC Inc. sold $987.4 Million and made a net profit of $81.4 Million, That’s about 8.2% net margin. This means, if an ABC Buyer can save $100,000 by being a better negotiator, this contributes just as much profit as if ABC could increase their total sales revenue by $1,219,512. And in today’s markets most companies are finding it rather difficult to increase sales.
So for ABC Inc. $100,000 in cost savings has the same impact as a $1,219,512 increase in sales.
Negotiating the Deal:
At the same time more organizations are pushing buyers to reduced costs, other organizations are pushing salespeople to increase sales—at higher margins. All this makes for some really tough negotiating.
So, what should salespeople do when negotiating prices with buyers that are on a price cutting mission?
Buyer’s must remain aware, and sometimes need to be reminded, that the cheapest per unit cost can often end up being the most expensive ‘total cost’ decision.
Switch from ‘Price’ to ‘Total-Cost’
Sellers must get buyers engaged in a ‘total-cost’ analysis. And it is in the buyer’s own best interest to do exactly that. This is really the only way a buyer is going to be able to discover, document, and get credit for ‘real cost savings.’ The blending of a buyer’s expertise on what they need, with a seller’s expertise on what is possible, provides a route to true cost savings. Best of all, during this discovery and analysis process, relationships are built which lays the groundwork for future business.
Satisfaction
The outcome of your negotiations must be a mutually agreed upon result that creates a Both-Win atmosphere rather than a one-win atmosphere. Satisfaction of both parties is key, and determines future business opportunities between the parties.
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Tense Recession Negotiations
Recessions create pressures which translate into tensions at the negotiating table. Sales are harder to close and margins are evaporating. Procurement and supply chain managers are under tremendous demands to reduce costs. Internal negotiations face increased competition for reduced resources.
Today your negotiating skills are critical—they might have become your survival skills! You are going to have to work harder – and smarter – to negotiate successful agreements.
The key issue today is how to negotiate a Both-Win outcome where both you and the other party benefit.
Don’t underestimate your negotiating power. So often we fail to examine the limits on the other party’s power. In a recession there may be more limitations on the other party. Only start a negotiation with full understanding of your strengths and a full examination of the potential pressures on the other side.
Slow down!
The longer a negotiation takes, the more you discover about yourself and the other party. This is the framework for a better agreement. A quick deal generally is a dumb deal. Not always but often. And a quick deal may fail if it leaves out what may be the most important part of a negotiation, which is making a better deal for both parties.
The cure for tense negotiations is to quickly transition into a search for a Both-Win outcome. This helps dissolve the tension. As soon as the other party senses what you are doing, their comfort level with you will soar. Suppose a salesperson says to a buyer: “Let’s stop talking about whether the price should be $1.00 or .95 cents. Let’s talk instead about ways to make this deal better for both of us. Do you need financing? How about staging shipments or just-in-time deliveries? What if I change the design like this? Can this specification be modified; it could save both of us some costs. Are there any ways we can increase the size of the project? When a salesperson does this, the potential for mutual satisfaction soars.
Examine Total Cost
The total cost approach is a powerful negotiating tool for any negotiation that is focused on prices. Direct the negotiation towards total cost instead of price. The price of what is being sold is only one component in the total cost of ownership. The process of identifying all of the components that go into ‘Total Cost’ provides a fertile environment for relationships to build between the negotiators and for each side to uncover potential Both-Win opportunities that are not focused on the single issue of price.
Many salespeople will have a tendency to convince themselves that if only they had lower prices they could bring in more business. They will increasingly discount their company and product advantages because buyers will be telling them that those ‘value added’ aspects don’t mean a thing today. Sure prices are important, but often price is not the crucial aspect of a negotiation. There can be many reasons to win or lose business besides price. The buyer who returns to their organization with the best price and nothing else is not considered a winner. The successful buyer is one who looks at the full picture, from quality to delivery to product specifications to support services and yes price. A buyer who gets what they need on the other issues can give a little on price. Will they? That’s going to be determined by negotiating skills.
Concessions and Satisfaction
The recession is going to condition everyone to ask for more and more concessions. How you make concessions is critical to success in negotiations. Make sure you do leave yourself room to negotiate, to come down. Why? You want to leave the other party with a degree of satisfaction. They want to leave the negotiation feeling that they have won some concessions, so make certain you allow for that. And don’t make large concessions. Large concessions leave the other party wondering what else they can get out of you. The same goes for making concessions too quickly. So go slow and small. Whenever you make a concession, learn to ask for something in return.
In a successful negotiation, in the final analysis what you are doing is creating satisfaction for the other party. In fact, all the advice above relates to that. These are ways to create satisfaction. If you happen to be in sales, do this and, even if you don’t land this deal, you will get a chance to negotiate on the next deal. You will have established a relationship, and that’s really how you will succeed in business. Recession or not.
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Are You Looking For Your 2%?
I've found most business negotiations can produce, at a minimum, a 2-3% swing in the resulting outcome. This doesn't sound like much does it? Only a 2% difference in the sales price. Only a 2% difference in the cost of materials. Only a 2% difference in the the amount of time. Only a 2% difference in the engineering specifications, or quality, or . . . . .
When you are negotiating an agreement, pause for a moment, and quantify what a 2% difference would make. When you do I think you are in for a big surprise.
Of course every organization is different, but let's look at a few real examples of the impact this little 2% can make. I will use information from public corporations since their financial statements are readily available as pubic information.
First let's look at Hewlett Packard. What would be the impact of a 2% reduction in cost of goods sold (think of all the procurement/manufacturing/engineering negotiations)? The 2% would result in a 21.7% increase in net profits for Hewlett Packard. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 28.7% increase in net profits for Hewlett Packard. The total potential opportunity --- a 50.4% increase in Hewlett Packard's net profits!
What about the Boeing Corporation? What would be the impact of a 2% reduction in cost of goods sold (procurement/manufacturing/engineering negotiations)? The 2% would result in a 26.3% increase in net profits for Boeing. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 32.7% increase in net profits for Boeing. The total potential opportunity --- a 59% increase in net profits for the Boeing Corporation!
Look at Caterpillar. What would be the impact of a 2% reduction in cost of goods sold (procurement/manufacturing/engineering negotiations)? The 2% would result in an 18.4% increase in net profits for Caterpillar. What would be the impact of a 2% increase in sales prices (margins negotiated by sales/marketing)? This 2% would result in a 25.4% increase in net profits for Caterpillar. The total potential opportunity --- a 43.8% increase in net profits for Caterpillar!
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As you can see, 2% makes a big difference! What about your negotiations? What about your company?
The next time you enter a negotiation, think about what that little 2% could do for your organization. What would be the impact on net profit? Make sure you understand what you might be giving away, or leaving on the negotiating table.
Once you approach your negotiations with a goal of searching for this little 2%, you will find you become more engaged with the other party; both of you will gain more information; and you will find opportunities that neither of you may have thought about before. There may be ways to create significantly more than the 2%. That's one of the secrets of true "BOTH-WIN" negotiating. But it all starts with the search for that little 2%.
Read more »