The following article was prepared by Mike Taylor, C.P.M.
February 2004

Creative Negotiation (part 4)

Note to new buyers: A concession isn't always price.

One of the best strategies you can use to move a stuck negotiation forward is to change the deal. What if we; buy two instead of one, take delivery somewhere else, agree to take it unpainted, change the packaging, etc.

This works because suppliers and buyers have much more to trade than just price. Consideration, concessions and incentives, come in many forms and vary with each deal. Most importantly, the various types of consideration we exchange have different values to each party in the contract. That is, any one item may be of more value to the buyer than to the seller. Great negotiators understand this principle and use it a lot.

Here are some obvious examples to illustrate the point.

• If the plant is shut down and delivery is critical are the extra few dollars in the price worth as much to the buyer as to the supplier?
• If the product has a very short shelf life does the minimum order quantity become a much more important issue to the buyer? What about to the supplier if the product has to be produced in large batches?
• If a supplier has a delivery truck already half full, he can afford to give away the rest of the space, just to get a better freight rate on the first half, but the buyer would have to pay full price to have it delivered by someone else.
• A supplier's cost to produce an item isn't the retail price charged. So a supplier can afford to deal on the second item and would rather do so, than discount the first purchase.

Example: It costs the pump company $900 to make the pump and cover overhead costs. They add $100 profit to sell the pump to me at $1000. When I buy one pump the manufacturer makes $100. If I ask for a discount, the manufacturer makes less profit. However, if the manufacturer talks me into taking two pumps, then he can give me a $100 discount, still make a profit of $50 on each pump, cover more of his overhead, move inventory, etc. while I get a $100 savings. The manufacturer might save far more than he would have made in profit.

O.K. You get the principle. We see it all the time. But, how to consistently apply it?

Here are some suggestions:

1. Compare the actual cost vs. the selling price of each element of a transaction. Are there markups, overhead, administrative cost and hidden costs? If so, who is paying them, how and when. Then apply all of your skills and knowledge to reducing, eliminating or mitigating the cost. 
   Example: Agreeing to pay an invoice by Electronic Funds Transfer (EFT) is a cash flow cost to the Buyer. But generating an invoice, matching a payment and sending it to the bank is a significant processing cost and delay to the seller. Also the seller may have long ago paid for raw materials and have a much bigger cash flow problem. Thus, changing payment terms to EFT could equate to a significant reduction in seller cost that should be reflected in the selling price. The reduction in selling price might more than make up for the cash-flow cost to the buyer.
2. Look at all of the possible variations that can affect the deal. Check out a relatively complete list of elements to consider negotiating in a contract. http://www.mltweb.com/tools/what.htm Chance are, there are one or two items on the list that should be added to the transaction and/or could be changed to save some cost or time.  
3.  Example: Contingencies are a major cost for casting and forging companies. If the first casting fails, it would be a major expense to have to restart the furnace to pour a replacement. Quite often, to avoid this cost, castings companies will pour extra raw castings (of course those extras are built into the selling price). A shrewd buyer will write the extra raw castings into the agreement and take delivery of the ones that are not needed. The buyer may end up with a few extra castings (which would have been paid for anyhow and could be buyer-furnished-material on future orders) and the seller has reduced risk of unused material. [ note: I used to love to work on casting and forging orders because there were so many money saving variations like this]
4. Consider what and how the seller has to do in order to fill the contract. Can you get your nose into his business and save everyone some time and cost? 
   Example: When a 100-line purchase order for office supplies is received by the seller, usually the first step is to have someone keypunch it into his computer. So, if the buyer paid someone to keypunch the items on the Purchase Order it's a duplicate effort for the seller to retype them that ads cost to the transaction. Finding a way to transmit the list electronically so it doesn't have to be keypunched a second time,  is a major savings in time, possible errors and cost.
   
   

Exercise: Brainstorm with some of your colleagues.

1. Create a list of items that buyers and sellers can us for consideration in a contract. List the ones that might have a different value to each. Ask "what can we trade that is of value to one or the other?"
2. For each item, make a list of the ways that the value can change for buyers and sellers. What can affect the value of 'delivery' that we should keep in mind?
3. Take a typical order and list all of the associated costs. Look for duplications, extras and hidden costs that can be eliminated, changed, transferred, or combined with something else.

Start being creative with how you think of the associated costs of orders. Include all of the cost factors in a negotiation, mitigate costs by changing the terms of the agreement and you will truly be a great negotiator.

Read more articles about negotiation and creative contract solutions in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm