Negotiation in sourcing process is important and the reason becomes so obvious once you realize that negotiation process presents an opportunity to actually get what you want.
WHAT IS NEGOTIATION IN PROCUREMENT?
Negotiation is a basic means of getting what you want from others. It’s a back-and-forth communication designed to reach an agreement when you and the other side have some interests that are shared and others that are opposed. (Fisher & Ury, Getting to yes)
Negotiation in purchasing and supply management can be defined as a process of planning, reviewing and analyzing used by a buyer and a seller when trying to reach acceptable agreement or compromises which include all aspects of the business transaction, not just prices.
The role of negotiation in procurement process can present itself in two broadways, meaning as the negotiator you will be:
- Acting as the company’s sole negotiator with the sales negotiator of the supplier (usually the case with low value, non-critical terms).
- Acting as team leader of a cross-functional negotiation team, usually for high-value, technically complex or strategic contracts, and for the development of long-term supply relationship agreement.
NEGOTIATING IN SOURCING PROCESS: HOW DOES IT WORK?
A typical sourcing process will involve the following steps:
Identify the need requisition
- Define the need specification
- Develop contractual terms
- Source the market -Identify potential suppliers
- Appraise suppliers
- Invite quotations or tenders, request for quotations or invitation to tender
- Analyze quotations and select most promising supplier
- Negotiate best value
- Award the contract
- Contract management
Negotiation can take place at any given point in the sourcing process, the only question you have to ask yourself is whether the negotiation is tactical or strategic.
Example of how this works
Negotiation during the need identification and definition
Some of the obvious reasons for negotiation in procurement are to identify and describe the needs you aim to take care of, which is what you do at the early stages of sourcing process.
In most cases needs are going to be identified the through:
- purchase requisition from a use department
- stock replenishment requisition from inventory control
- a new product design specification
The purchasing only makes sense if these needs are going to be met and that means negotiators have to understand the needs or the specifications.
POST TENDER NEGOTIATION: What is you want something changed before contract award
Even if you choose to go with competitive bidding, since some tenders in public sector may require competitive bidding, a supplier’s tender may need clarification.
This is where post-tender negotiation comes in.
Post tender negotiation according CIPS is: negotiation after receipt of formal tenders and before the letting of contract(s) with the supplier(s) or contractor(s) with a view of obtaining an improvement in price, delivery or content in circumstances which do not put other tenders at a disadvantage or affect their confidence or trust in the competitive tendering system.
Quick guidelines for buyer regarding PTN
- To ensure transparency, have at least two members of the purchasing organization in the post tender negotiation meeting
- The negotiators from the purchasing organization should have cleared their proposed negotiation strategy with relevant managers before entering the meeting. They should also have predetermined criteria as to what terms are acceptable from the supplier
- Notes of the meeting should be taken to ensure that a record is kept of the negotiations and conclusions. Its good practice to show the notes to the supplier at the end of the meeting so that they can agree that they are a fair summary or suggest amendments
- Buyers should conduct the negotiation in a professional and ethical manner
If post tendering negotiation doesn’t work with the first supplier, basically you don’t get the terms you desire then you can move on to the next supplier
RELATED: How to deal with bid-rigging in procurement
Contract and relationship management will also call for negotiations
Once contracts have been negotiated and signed:
- There will be obligations and actions to be followed up on either side. In the event of any misunderstanding negotiation is used to find a solution
- If risk events or contingencies arise, the contract may (or may not) lay down what happens next and a way forward may be determined jointly through negotiations
- If performance fails to conform to agreed terms and standards, there will be a variety of options for pursuing the dispute, enforcing the terms of the contract or gaining Negotiations will at this point serve as alternative dispute resolution mechanism
- Circumstances and requirements may change over the life of the contract and that means re-negotiation and amendments
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