Chapter 4 Principles of Supply Chain Management (5e)

LO7- ETHICAL AND SUSTAINABLE SOURCING

LO7 – Ethical Sustainable Sourcing
1. Common Ethical Practices in Sourcing
2. Ways of Enforcing Ethical Behaviour in Organizations
3. Supply Base Rationalization / Optimization
4. Key Benefits of Supply Base Rationalization / Optimization
5. Concept of Strategic Supplier Alliance
6. Benefits of having Strategic Supplier Alliances

LO8 – Negotiation & Conflict Management

1. The Negotiation Framework In Supply Management (Basic 5 Steps)
2. Factors Leading to Negotiation instead of Competitive Bidding
3. Planning for Negotiation (Key Areas Covered in Planning)
4. International Negotiations (Complexities related to International
Negotiation)

Prepared by Cynthia Wisner, MBA

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 1

Morality

 Business Ethics - the application of ethical principles to business

situations
 Utilitarianism - an ethical act creates the greatest good for the
greatest number of people
 Rights and duties – a theory stating that some actions are right in
themselves without regard for the consequences

Create POSITIVE SOCIAL CHANGES

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 Principles of Supply Chain Management (5e) LO7.1

Common Ethical Practice

• Discontinuing purchases from firms that use child labor or other
unacceptable labor practice
• Buying from firms in underdeveloped nations
• Promoting diversity by intentionally buying from small firms, ethnic
minority businesses and women-owned enterprises
• Compliance with Law and Regulations
• Anti-corruption Measures
• Whistleblower Protection
• Fair competition
• Avoid conflicts of Interest

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 Principles of Supply Chain Management (5e)

• Business ethics- the application of ethical principles to business

situations
• Fair trade product- manufactured or grown by a disadvantaged producer
in a developing country that receives a fair price for their goods
• Ethical Trading Initiative (ETI) – an alliance of organizations seeking to
take responsibility from improving working conditions and agreeing to
implement the ETI Base Code

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined,

Part 2
 Corporate Social Responsibility is the practice of business ethics

 Ethical Sourcing is that which attempts to take into

account the public consequences of organizational
buying or bring about positive social change through
organizational buying behavior

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 Principles of Supply Chain Management (5e)

Ethical sourcing

Attempts to take into account the public consequence of organizational buying and bring about
positive social change through organizational buying behavior
Utilitarianism [‚juː'tɪlɪ'terɪənɪzm - An action creating the greatest good/welfare for the greatest
number of people
Rights and duties: A theory stating that some actions are right in themselves without regard for
the consequences, duties oblige others to take actions to protect the rights

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable

Ethical sourcing practices include –
Sourcing Defined, Part 3
• Promoting diversity by intentionally buying from small firms, ethni
minority businesses, and women-owned enterprises
• Discontinuing purchases from firms that use child labor or other
unacceptable labor practices
• Buying from firms in underdeveloped nations.
• Compliance with Laws and Regulations
• Anti-corruption Measures
• Whistleblower Protection
• Fair competition: standard practice needs to follow, protect interests of law when sth wrong with the measures- eth
standards

• Avoid conflicts of Interest: equal chance to take part in the competition, transparent systems,
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 4

Ethical Policies should include –

• Determining where all purchased goods originated and how they were
made
• Knowledge of the suppliers’ workplace principles
• Inclusion of ethics as a performance rating
• Independent verification of vendor compliance
• Report of supplier compliance to stakeholders
• Provision of detailed ethical sourcing expectations to supplier s
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 5

• Ethical Trading Initiative (ETI) - an alliance of organizations seeking to take

responsibility for improving working conditions and agreeing to implement the ETI
Base Code
• Fair trade product - manufactured or grown by a disadvantaged producer in a
developing country that receives a fair price for their goods

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 6

Table 4.1 The Ethical Trading Initiative’s Base Code
Clauses Abbreviated Explanations Clauses Abbreviated Explanations

1. Employment is freely
chosen
No forced, bonded or involuntary
prison labor.
6. Working hours are Working hours comply with national laws and
benchmark industry standards
not excessive
2. Freedom of association Workers have the right to join 7. No discrimination is No discrimination in hiring, compensation,
and the right to collective trade unions and to bargain practiced access to training, promotion, termination
bargaining are respected collectively- thương lượng tập thể or retirement

3. Working conditions are Accommodations shall be clean, 8. Regular employment is Work performed must be on the basis of
safe and hygienic safe and meet the basic needs of recognized employment relationships
workers
provided established through national law and practice

4. Child labor shall not be Persons under 18 shall not be 9. No harsh or inhumane Physical abuse or discipline, the threat of
used employed at night or in hazardous treatment is allowed physical abuse, sexual or other
conditions harassment or other forms of
intimidation shall be prohibited

5. Living wages are paid Wages should be enough to meet Empty cell Empty cell
basic needs
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 Principles of Supply Chain Management (5e)

Enforcing Ethical behavior LO7.2

1. Developing Statement of Ethics
2. Top Management Commitment
3. Transparency in Buyer-Seller Relationships
4. Ethical Training
5. Developing consistent behavior across Departments
6. Internal Reporting of Unethical Behavior
7. Preventive Measures (Buyer Commodity Rotation and Limits of
Authority)

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 Principles of Supply Chain Management (5e)

Corporate Social Responsibility (CSR)

• In the concept that a company should play a positive role in the
community and consider the environmental and social impact of business
decisions
• Closely linked to Sustainability – creating economic, social and
environmental value- and ESG – which stands for environment, Social
and Governance
• 4 Types of CSR
Environmental Responsibility
Social responsibility (Ethics/Human Rights)
Philanthropic Responsibility
Economic/Corporate Responsibility
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 Principles of Supply Chain Management (5e)

Sustainable Sourcing
 Ability to meet current needs of the supply chain without hindering the ability
meet future needs in terms of economic, environmental, and social challenges
Support the three P’s- People, Planet, and profit
Sustainability is moving from voluntary to legally mandated initiatives
90% of US companies on the S& P 500 sustainability report in 2020
Focus areas:
Respecting human rights and reducing poverty by creating profit trading
Working within the finite limits of the planet’s resources
Moving towards a low carbon economy

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Strategies

• Sustainable Sourcing should focus on
• Respecting human rights & and reducing poverty by creating profitable trading
• Working within the finite limits of the planet’s resources
• Moving towards a low carbon economy

•Green purchasing ensures products or materials meet environmental objectives e.g.

waste reduction, hazardous material elimination, recycling, remanufacturing, and
material reuse
•Sustainability - ability to meet current needs of the supply chain without hindering
the ability to meet future needs in terms of economic, environmental, and social
challenges
•Supports the three P’s - people, planet, and profit
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 7

Sustainable Sourcing should seek to –

• Grow revenues
 New sustainable product introduction
• Reduce costs
 Increase resource efficiencies- tăng hiệu quả sử dụng nguồn lực
• Manage risk
 Link the brand to the social consciousness of the consumer
• Build intangible assets
 Build social and environmental responsibility
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 8

• Sustainability is moving from voluntary to legally mandated

initiatives
• Three-quarters of U.S. companies on the S&P 500 issued some
type of corporate sustainability report in 2014
• European Union requirements for sustainability reporting went
into effect in 2017

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 Principles of Supply Chain Management (5e)

DEVELOPING ETHICAL AND SUSTAINABLE

SOURCING STRATEGIES, Part 1

Functional Products - MRO items & other commonly low profit

margins with relatively stable demands & high levels of competition
Examples - equipment maintenance & and office cleaning products
Innovative Products - characterized by short product life cycles,
volatile demand, high profit margins- tỉ suất lợi nhuận cao, & and
relatively less competition
Examples - Tesla’s Model S automobile, new software applications,
or new robotics systems

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 Principles of Supply Chain Management (5e)

DEVELOPING ETHICAL AND SUSTAINABLE

SOURCING STRATEGIES, Part 2
Framework for ethical and sustainable sourcing strategy
development –
Step 1 – Establish corporate ethical and sustainable sourcing policies
Step 2 – Train purchasing staff and implement policies
Step 3 – Prioritize items based upon ethical and sustainability opportunities and ease o
implementation
Step 4 – Develop performance measurement system
Step 5 – Monitor progress and make improvements. Increase the use of green and fair
trade products
Step 6 – Expand focus to include other departments

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 Principles of Supply Chain Management (5e)

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification

Programs, Part 1
Supplier certification programs are used to identify strategic supplier
alliance candidates

Strategic alliances - more formalized type of collaborative relationship

involving
- commitments to long-term cooperation and trust
- shared benefits and costs
- joint problem solving
- continuous improvement
- information sharing
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 Chapter 4 Principles of Supply Chain Management (5e)

LO7- ETHICAL AND SUSTAINABLE SOURCING

LO7 – Ethical Sustainable Sourcing
1. Common Ethical Practices in Sourcing
2. Ways of Enforcing Ethical Behaviour in Organizations
3. Supply Base Rationalization / Optimization
4. Key Benefits of Supply Base Rationalization / Optimization
5. Concept of Strategic Supplier Alliance
6. Benefits of having Strategic Supplier Alliances

LO8 – Negotiation & Conflict Management

1. The Negotiation Framework In Supply Management (Basic 5 Steps)
2. Factors Leading to Negotiation instead of Competitive Bidding
3. Planning for Negotiation (Key Areas Covered in Planning)
4. International Negotiations (Complexities related to International
Negotiation)

Prepared by Cynthia Wisner, MBA

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification Programs,

Part 2

Firms use in-house formal certification programs, & most require ISO
9000 / 14000 or similar certifications as part of the certification process

Ethical and environmental certifications - used by various

organizations to identify rogue suppliers and suppliers who fail to certify
according to ethical requirements

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 Principles of Supply Chain Management (5e)

Supply Base Rationalization Programs LO7.3

Hợp lý hóa cơ sở cung ứng
Supply base rationalization (AKA supply base reduction or supply
base optimization) – firms seek to reduce purchases from poor-
performing suppliers while concentrating purchases among their top-
performing suppliers
LO7.4

Buyer-supplier partnerships are easier with a rationalized supply base &

result in –
• Reduced purchase prices (due to quantity discount)
• Fewer supplier management problems
• Closer and more frequent interaction between buyer & supplier
• Greater levels of quality and delivery reliability (since only the best suppliers remain in the supply base).
• brand enhancement and better environmen­tal and ethical performance.

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 Principles of Supply Chain Management (5e)

Outsourcing Products and Services

Outsourcing – firms purchase materials or services instead of producing them in-house
Allows a firm to -
• Concentrate on core business activities
• Reduced purchase prices (due to quantity discount)
• Fewer supplier management problems
• Closer and more frequent interaction between buyer & supplier
• Greater levels of quality and delivery reliability (since only the best suppliers remain in the supply base).
• brand enhancement and better environmen­tal and ethical performance.

Latest Trends in Outsourcing

• Nearshoring
• Friendshoring
• HR Outsourcing
• Digital Outsourcing
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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 1

Early supplier involvement (ESI) highly effective supply chain techniques
where key suppliers become more involved in the internal operations of their
customer, which may include
• Managing inventories at their customers’ points of use
• Participating in their customers’ new product & process design processes
Value engineering activities help the firm to reduce cost, improve quality &
reduce new product development time

reduce production lead times and time to market while reducing costs and thus producing better profit margins.
establishes a level of trust and cooperation that results in many future collaborative and potentially successful projects
Cost reductions occur with use of more standardized parts, fewer parts, and less expensive materials. Cost, quality,
innovation, and delivery timing improvements can all occur when suppliers use the information gained through early
supplier involvement to design parts at their own facilities to match a buy­er’s specifications

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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 2

Vendor managed inventory (VMI) –
Suppliers manage buyer inventories to reduce inventory carrying costs &
avoid stockouts for buyer
From the buyer-firm’s perspective –
• Supplier tracks inventories
• Determines delivery schedules and order quantities
From the supplier’s perspective –
• Avoids ill-advised customer orders
• Supplier decides inventory set up & shipments
• Opportunity for supplier to educate customers about other products
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 Principles of Supply Chain Management (5e)

Strategic Supplier Alliances

LO7.5
LO7.6
• More formalized type of collaborative relationship with suppliers
involving
Commitment to long-term cooperation and trust
Shared benefits and costs
Joint problem solving
Continuous improvement
Information sharing

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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 3

Co-managed inventories - buyer and supplier reach an agreement regarding

how information is shared, order quantities, when order is generated and delivery
timing
• Preferable for high value items
• When customer desires more input into the day-to-day supply activities
• When customer is still assessing a supplier’s ability to take full responsibility

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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 1 LO7.5

Strategic alliance development - refers to improving the capabilities

of key trading partners

Strategic supplier alliances result in

• Better market penetration
• Access to new technologies & knowledge
• Better service

Alliance development eventually extends to a firm’s second-tier

suppliers, as the firm’s key suppliers begin to form their own alliances.

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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 2

Table 4.4 Maintaining a Successful Strategic Alliance Program

Steps Discussion LO7.5

1. Determine the key strategic Can be based on business units, geographic areas, industries, key alliance
parameters to organize around. partners, or combinations of these.

2. Facilitate the dissemination of Alliance management and development information should be centrally
information. controlled and available through internal Web sites, pamphlets, and worksho
3. Elevate the importance of the strategic Assign a director or vice president of alliance programs, reporting to top
alliance program. management. Establish consistent procedures for alliance programs through
the organization.

4. Provide continuous evaluation of Management can increase the value and acceptance of alliance programs
alliance performance, visibility, and when successes are made visible to the firm’s lower level managers and
support. employees. Alliance management requires resources and ongoing
reevaluation.
5. Reward suppliers as performance Rewards typically include increased business and other nonmonetary award
merits.
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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 3

For successful strategic alliance programs: LO7.5

• Organize a program that cuts across functional boundaries

• Disseminate program information quickly & effectively
• Acquire the necessary resources
• Create program acceptance by the line managers & employees
• Achieve concrete, measurable success
• Reward supplier performance

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 Principles of Supply Chain Management (5e)

Negotiating Win-Win Strategic Alliance

Agreements, Part 1
Collaborative negotiations (aka integrative negotiations) –
Both sides work together to maximize the outcome or create a joint
optimal result
 Requires open discussions and a free-flow of information between parties

Distributive negotiations –
Refers to a process that leads to a self-interested, one-sided outcome

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 Principles of Supply Chain Management (5e)

Negotiating Win-Win Strategic Alliance

Agreements, Part 2
Steps Description
1. Build preparation process Gain an understanding of both parties’ interests; brainstorm value-maximizing
solutions; identify objective criteria to evaluate fairness of agreement.

2. Develop negotiation database Review previous negotiations to catalogue standards, practices, precedents,
metrics, creative solutions used, and lessons learned.

3. Design negotiation launch Create an environment to work together to create a shared vocabulary, build
process working relationships, and map out a shared decision-making process.

4. Institute feedback mechanism Create process to provide feedback to negotiating teams and capture lessons
learned.

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 Principles of Supply Chain Management (5e)

Rewarding Supplier Performance

Rewarding suppliers provides an incentive to surpass performance goals

Punishment is a negative reward, may be to reduce future business; or a bill back

penalty equal to the incremental costs resulting from a late delivery or poor quality

Strategic supplier agreements can reward suppliers by allowing –

• A share of the cost reductions
• More business and/or longer contracts
• Access to in-house training seminars & other resources
• Company & public recognition

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 Principles of Supply Chain Management (5e)

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 Principles of Supply Chain Management (5e)

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing

Practices, Part 1
Benchmarking – measuring what other businesses do best and
matching their performance

Examples of obtaining benchmarking data

• Using surveys distributed to customers and suppliers
• Discussing sourcing strategies with colleagues
• Collecting published trade information

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing Practices, Part 2

14 Common Successful Sourcing Practices
1. Use of a central database to access information on parts, suppliers, lead
times
2. Software applications for sharing information with suppliers
3. Use of the Internet for supplier searches;
4. Alliances with key suppliers for specific components
5. Reducing the firm’s supply base

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing Practices, Part 3

Common Successful Sourcing Practices

6. Supplier certification & eliminating need for incoming quality
checks
7. Involving suppliers in research & development processes of new
products
8. Continuous measurement of supplier performance, & establishing
supplier improvement targets
9. Creating an ethical and sustainable supply chain

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 Principles of Supply Chain Management (5e)

Assessing & Improving the Firm’s Sourcing

Function, Part 1
The sourcing function is one of the most value-enhancing functions
in any organization

• Performance is periodically monitored against set standards,

goals, and/or industry benchmarks

• Surveys or audits can be administered as self-assessments as

part of the evaluation process

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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Sourcing Function, Part 2

Sourcing Function- Assessment criteria include –

1. Participating/leading multifunctional teams 8. Creating strategic supplier

2. Participate in value engineering efforts alliances

3. Finding/evaluating ethical and sustainable 9. Contribute to new product

suppliers development

4. Optimize supply base 10. Initiate supplier cost reduction

programs
5. Managing local, regional and global suppliers
11. Improvement of purchased product
6. Early supplier involvement initiatives & service quality
7. Further supplier integration 12. Improve time to market
13. Maintain internal cooperative
relationships

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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Purchasing Function

Purchasing Professionals Skill Set Requirements
Top three responsibilities Cost-controlling activities
• Negotiating contracts • Reducing supply base
• Selecting suppliers • Negotiating global agreements
• Managing supplier • Adopting new purchasing technologies
relationships

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otherwise on a password-protected website or school-approved learning management system for classroom use.
42
 Principles of Supply Chain Management (5e)

End of Chapter 4

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otherwise on a password-protected website or school-approved learning management system for classroom use.
43
 Purchasing &
Supply Chain
Management
7th edition

Chapter 13
Negotiation and Conflict Management

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 What Is Negotiation?
• A process of formal communication, either face-to-face or via electronic means,
where two or more people, groups, or organizations come together to seek mutual
agreement about issue or issues
• Involves management of
 time, information, and power (influence) between individuals and
organizations who are interdependent
• Relationships between people, not just organizations
• The role of persuasion
• Negotiation skills can be learned and enhanced
Supports implementation of supply management strategies and plans

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©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46
©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47
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 Common Terms Used in Negotiation

• BATNA • Issue
• Position • Strategy
• Interest • Power
• Need • Concession
• Want • Tactic
• Fact

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 BATNA
• That point where it is advantageous to walk away from the negotiation
− Best Alternative to a Negotiated Agreement
− Bottom line or reservation point
• Should never be revealed to other party
• All settlements must be judged in light of all other viable alternatives existing at
the time of the agreement

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 Position

• Negotiator’s opening offer

−Represents the optimistic (or ideal) target
value of issues being negotiated
• Stated demand at the negotiation table

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 Interest

• Unspoken motivation or reason that underlies any

given position
• Unlikely to be expressly stated or acknowledged
−If done, usually results in loss of power
• May not be directly germane to a stated position
−Often personal in nature

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 Key Points on Interests

• Learn to play detective

−Try to discern other party’s interests through a
series of open-ended, probing questions
−Then listen carefully
• Always focus on the other party’s underlying
interests, not its stated positions

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 Needs vs. Wants

• Need
−Negotiated outcome that negotiator must achieve
• Want
−Negotiated outcome that a negotiator would like to have
−May often be exchanged as a concession

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 Triangle Talk
Step 3:
“Propose Action in a Way that They Can Accept”

The
Step 1: Negotiation Step 2:
“Know “Know
Exactly What Process Exactly What
You Want” They Want”
Purchasing & Supply Chain Management, 6e
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 Know Exactly What You Want

• Determine and formalize specific goals and objectives

−Helps retain clear focus and minimize distraction
−When written, can be referred to readily during
negotiation
−The more clearly defined, the more likely that priorities
can be achieved

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 Know Exactly What They Want

• Attempt to discern other party’s likely needs and wants

−Estimate underlying interests to other party’s stated
positions
• Beware of expecting other party to think in same way as you
do
• Ask probing, open-ended questions to confirm or counter
assumptions

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 Propose Action in a Way
that They Can Accept
• Frame your own needs in terms of other party’s
needs
• Make it easy for other party to say “Yes”
• Remain fair, flexible, and reasonable
• Address their needs first

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 The Negotiation Framework LO8.1

1. Identify or anticipate a sourcing requirement

-future alliance
-KPIS defined
--influence and specify: errors/ complext Đấu giá, trả giá
2/ Determine if negotiation or bidding is required
Meeting before to deliver a message, conv
3. Plan for the negotiation the point- start the opening is important. E
price, direction , process…. Come with pla
ambiance, structure, place…

4. Conduct the negotiation -offer, give counteroffer, enforce the ex

5. Execute and follow up on the agreement

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©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60
 LO8.1
1. Identify or Anticipate a Sourcing
Requirement
• Purchase requisitions
• Inventory counts
• Reorder point systems
• New product development/Innovations
• New facilities requirement

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 2. Determine If Negotiation or Competitive
Bidding Is Required LO8.2
• Is the bid process inadequate?
• Are many non-price issues involved? LO8.1

• Is the contract large?  the need to agree on non-price issues,

 other reasons exist for negotiating with
• Are technical requirements complex? suppliers:

• Does the contract involve plant and equipment?

• Does the contract involve a partnership?
• Will the supplier perform value-added activities?
• Will there be high risk and uncertainty?
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 LO8.1
3. Plan for negotiation

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 LO8.1
4. Conduct the negotiation

1. Perform fact finding: This part of the process helps clarify and confirm information provided
by the buyer and seller.
2. Recess or caucus as necessary: Thisallows each party the opportunity to reassess
relative strengths and weaknesses, review and revise objectives and positions if necessary, and organize
the negotiation agenda.
3.Work to narrow differences
4. Manage time pressures
5. Maintain informal atmosphere
6.Summarize progress periodically
7.Employ tactics
8. Keep relationships positive
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 LO8.1
5. Execute and follow up on the agreement
1.Provide performance feedback
2.Build on the success of the negotiation

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 LO8.2????
When to Negotiate
• Liability for loss or damage • Contract length and renewal
mechanism
• Payment terms and currency
exchange • Protection of proprietary information
• Progress payment schedules • Ownership and use of intellectual
property
• Warranties and replacements
• Resources related to developing
• Capacity commitments
closer relationships
• Penalty clauses
• Performance incentives

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 When to Negotiate
• Identification of allowable or • Technological support and assistance
reimbursable costs
• Contract volumes and release timing
• Delivery schedules and lead times
• Special packaging, handling, and
• Expected product and service shipping
quality levels
• Mode of transportation and
• Performance metrics and how responsibility for carrier selection,
information is gathered, shared, and filing freight claims, and loss and
used damage claims

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 LO8.2????
When to Negotiate
• Improvement requirements • Spare parts
− Quality • After-sales service
− Delivery • Operator or maintenance support
− Lead time,
• Access to technology
− Cost
− Responsiveness
• Contract dispute resolution
mechanisms

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 LO8.2????
Reasons for Negotiation
• The total contract value or volume is large
• The purchase involves complex technical requirements
− Product and process requirements and specifications may still be evolving
• The purchase involves utilization of capital-intensive plant and equipment

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 LO8.2????
Reasons for Negotiation
• The agreement involves a special or collaborative relationship
• The supplier will perform important value-added activities, requiring …
− Appropriate compensation
− Performance standards
− Performance metrics

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 LO8.3????
Planning for the Negotiation
• Better planning  better outcomes
• Electronic communication tools vs. face-to-face negotiations
− Reduce expensive and time consuming travel
• Use of online RFP and RFQ templates
− Quick turnaround on changes
− Simultaneous negotiations with multiple suppliers

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 Points to Focus On
• Defining the parties’ issues, needs, and • Assessing the role of constituents and the
wants social context
• Assembling relevant information on • Analyzing the other party
issues, needs, and wants
• Planning issue presentations and defenses
• Defining the bargaining mix
• Defining process protocols
• Defining the parties’ likely interests
− Agenda
• Defining own objectives and opening − Location
offers
− Timing
− Participants

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 4. Phases of the Negotiation
• Phase I
− Fact finding and information sharing
− Clarify or confirm information
• Phase II
− Recess to assess new information and findings
− Assess relative strengths and weaknesses
− Review and revise objectives and positions, if necessary
− Organize agenda

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 Phases of the Negotiation
• Phase III
− Meet face-to-face or electronically
− Narrow differences on issues
− Offer proposals and counterproposals
− Exchange concessions
• Phase IV
− Seek agreement
− Conclude negotiation
− Agree to follow-on activities

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 Being an Effective Negotiator
• Willing to compromise or revise goals when faced with new information
• Viewing issues independently
• Establishing upper and lower ranges for each major issue
• Exploring more viable options
• Building and focusing on common ground rather than differences

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 Being an Effective Negotiator
• Avoiding irritating comments
• Avoiding argumentation
− Too many reasons can dilute an argument (loãng)
• Making fewer counterproposals
− Too many concessions
− Compromising too much
− May indicate lack of adequate planning and show invulnerability

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 5. Execute and Follow Up on the Agreement
LO8.1
• Actual performance or management of contract
• Load into organization’s contract management system for visibility
• Provide performance feedback
• Build on success of negotiation
• Monitor contract provisions
• Reaffirm commitment of parties

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 Negotiation Planning
LO8.3
• Develop plan and overall strategy
− Specific strategies
− Research
− Actions
− Tactics

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 Reasons for Failed Negotiations
LO8.3

• Neglecting the other party’s problems

• Focusing too much on price
• Focusing on positions instead of interests
• Focusing too much on common ground
• Neglecting BATNAs
• Overadjusting perceptions during actual negotiation
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 Planning for Negotiation (Key Areas covered in Planning)
Negotiation Planning

1. Identify participants
2. Develop objectives
3. Analyze strengths and weakness
4. Gather information
5. Recognize counterpart’s needs
6. Identify facts and issues
7. Establish positions
8. Develop strategies and tactics
9. Brief personnel
10. Practice the negotiation

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 3.1. Develop Specific Objectives
LO8.3
• Objective
− Aspiration or vision to work toward in future
• Typical objectives
− Acceptable unit price
− Contract quantities
− Required delivery lead time
− Improved supplier quality

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 3.1.Develop Specific Objectives
LO8.3
• Not all objectives are equally important
− Need to prioritize
 Must have (needs)
 Would like to have (wants)
− Serves as basis for concession strategy

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 3. 2.Analyze Each Party’s
Strengths and Weaknesses
LO8.3
• Understand through research and experience
− Personality
− Negotiation style
− History of the other party
• Assess relative strengths and weaknesses, i.e., “due diligence”
− Each negotiation experience is unique

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 3.3. Gather Relevant Information
LO8.3
• Previous experience with the other party
− What happened between parties?
− Was the negotiator satisfied with the previous outcome?
− Are we negotiating with same people or with different negotiators?
− What were important issues to the supplier? To the buyer?

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 3.3. Gather Relevant Information
LO8.3
• Previous experience with other party
− What were the areas of disagreement?
− Is there anything about previous conduct or protocols that should be
changed?
− What is the relative power between parties?
− Who has the most to lose? To gain?

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 Sources of Information
• Other buyers or organizations with experience with supplier
• Published sources of information
− Trade journals, other business publications, and Internet websites
− Trade association and government data
− Annual reports
− Financial evaluations and databases
− Direct inquiry with supplier

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 3.4. Recognize Your Counterpart’s Needs
LO8.3
• Must consider longer-term success
• Issues critical to supplier may not be issues critical to buyer, and vice
versa
• Give-and-take must be considered
− Each party should not expect to prevail in all issues
− Setting priorities for concessions and issue tradeoffs

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 3.5. Identify Facts and Issues
LO8.3
• Fact
− Reality or truth that parties can state and successfully verify
• Issue
− Items or topics to be resolved
• Triangle Talk is a helpful tool

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 3.6. Establish a Position on Each Issue
LO8.3
• Need for agility and flexibility
• Range of positions
− Minimum acceptable position (BATNA)
− Maximum, or ideal, position
− Most likely outcome
• Overlapping positions create bargaining or settlement zone
− “Heart” of the negotiation process

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 Bargaining Zone Example
Buyer
$11.00 $11.45

Aspiration

Aspiration
BATNA
BATNA
Point

Point
Zone of Likely
Agreement

$11.15 $11.50
Note:
Example shown is a typical buyer- Seller
seller negotiation on price

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 Factors in Modifying Positions
• Desirability of the contract
• Revelation of irrefutable information that challenges accuracy and
credibility of original position
• Major concession that promotes reciprocation on another issue

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 3.7. Develop the Negotiation Strategy
and Accompanying Tactics LO8.3
• Strategy
− Overall approach used to reach mutually beneficial agreement
• Tactic
− Art or skill of employing available means to accomplish an end,
objective, or strategy
− Includes supporting action plan and activities

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 3.8. Brief Other Stakeholders
LO8.3
• Stakeholder
− One who has an interest in or will be affected by negotiation
outcome(s)
• Need to be aware of, and in agreement with, desired objectives
− Includes major issues and initial positions for those issues
− Prevent unwanted surprises
− Develops stakeholder buy-in and support

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 3.9. Practice the Negotiation
LO8.3
• Applies to complex and formal negotiations that are …
− Large dollar amount
− Long span of time
− Crucial to success of organization
• Mock or simulated negotiation
− Helps raise awareness of unanticipated questions and issues
− Role play other party to develop empathy

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 Force Field Analysis
• Negotiation is a form of change management
• Force field analysis is a long-established change management technique
− Considers the situational forces that push for (driving forces) or
against (restraining forces) a particular outcome
− Provides a visual representation of forces affecting the negotiation
• Need to consider the impact of these forces when planning for a
negotiation
− Supplement or strengthen driving forces
− Reduce or mitigate restraining forces

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 Force Field Analysis Example

Forces Driving Forces Restraining

Price Increase Price Increase
Price Increase

Labor Contract Industry Competition

Materials
Duties and Tariffs

Shipping
Stage of Product Life Cycle

Inflation

Seasonality

Point A Point B
Current Price Proposed Price

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 Power in Negotiation
• Power
− Ability to influence another person or organization to do something
• Power by itself is neither good nor bad
− It is actual application or use of power that makes it good or bad
• Sources of negotiating power

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 Sources of Negotiating Power
• Informational power
• Reward power
• Coercive power
• Legitimate power
• Expert power
• Referent power

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 Informational Power
• Ready access to relevant and useful information
• Presentation of facts, data, and persuasive arguments
− Need for selective disclosure
− Can be manipulated by withholding information or by providing false
information

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 Reward Power
• One party is able to offer something of perceived value to other
• Direct attempt to exert active control
• Individuals respond and behave accordingly when valued rewards are
available

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 Coercive Power
• Taking away or withholding something of value to other party
• Ability to punish
− Financially, physically, or mentally
• Can have damaging effects on long-term relationships
• Promotes retaliation or getting even

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 Legitimate Power
• Power based on official position held
− The higher the job position or title, the greater the power inferred
• May be separate from reward power or coercive power
• Buyer has legitimate power due to his/her ability to award contract

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 Expert Power
• Special form of informational power
− Development and retention of body of knowledge
• Often represented by verifiable credentials and stature
• Reduces likelihood of refuting position
− Other party must value expertise in order to be effective

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 Referent Power
• Comes from attraction based on socially acceptable personal qualities
and attributes
− Personality or attractiveness characteristics such as …
 Honesty
 Charisma
 Friendliness
 Empathy
 Sensitivity

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 Application of Power
• Used to support one’s advantage
• Need to be careful not to abuse power
− Damaged relationships
− Invited retaliation
− Diminished value of that power
• Some types of power interact synergistically with others
− Example – expert and referent power

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 Concessions
• Movement away from a position that has perceived value to other party to
gain something else of value
− Give-and-take process is normal in most negotiations
• Need to avoid giving away concessions without receiving something of
equal or greater value in return
− Always keep the BATNA in mind

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 Concessions
• Without effective concessions strategy, negotiation may result in impasse
• Concessions should be made in decreasing increments, not increasing
ones
− Increasing concession values encourage other party to wait you out for
even greater concessions
• Based on length and cost of negotiation

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 Guidelines for Making Concessions
• Give yourself enough room to make concessions
• Try to get other party to reveal his/her needs and objectives first
• Be first to concede on a minor issue but not first on a major one
• Make unimportant concessions and portray them as valuable
• Make other party work hard for every concession made
• Use tradeoffs to obtain something for every concession you make
• Generally, concede slowly and give a little with each concession
• Do not reveal your deadline to other party – ever
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 Guidelines for Making Concessions
• Occasionally, say “No” to other party
• Be careful trying to take back concessions, even tentative ones
• Keep a record of concessions made and try to identify a pattern
• Do not concede too soon, too often, or too much

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 Negotiation Tactics:
Trying to Reach Agreement
• Short-term plans and actions employed to ...
− Execute strategy
− Cause a conscious change in other party’s position
− Influence others to achieve one’s own objectives
• Can be either ethical or unethical
− Tricks or ploys

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 Common Negotiation Tactics

1. Low ball (low price first) 7. High ball

2. Honesty and openness 8.Best and final offer
3. Questions: open-ended 9. Silence
4. Caucus- họp kín 10. Planned concessions
5. Trial balloon: test 11. Venue
acceptability
6. Price increase
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 Cialdini’s Power of Influence
1. Reciprocation
2. Consistency
3. Social proof
4. Liking
5. Authority
6. Scarcity

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 Reciprocation
• Obligation to give something back of equal or greater value to someone after
having received something from them
• Creates powerful obligation response
• Can be used effectively when giving concessions
• Patterns of concession
− Quid pro quo

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 Consistency
• People tend to want to be perceived as being consistent in their beliefs
and actions
− Otherwise considered to be irrational
• It is difficult to back away from something already agreed to
• Beware of the consistency trap
− Small commitments often lead to much larger ones

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 Social Proof
• Looking to behavior of others to determine what is desirable, appropriate, and
correct
• Power of endorsement- sức mạnh của chứng thực
• Everyone else is doing it

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 Liking
• People work well and are more agreeable with others that we like or who are
like us
• Get to know other party better to build on relationship when concessions are
being offered

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 Authority
• People are more likely to accept positions, arguments, and directions from
recognized authority figures
• Power of titles and perceived importance

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 Scarcity
• Can also be “perception” of potential scarcity
− “Act now!”
− “For a limited time only!”
− “Offer expires tomorrow!”
• Suppliers often use potential price increases as a scarcity technique
− “Twenty percent price increase effective at the first of the month!”

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 Overcoming Tactics
• Modify tactics when they don’t work
• Prepare for likely tactics to be used against you
• Tactics are more effective if you are unprepared, stressed, under severe
deadlines, inexperienced, fatigued, or disinterested
• Try not to react without thinking

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 Win-Lose vs. Win-Win Negotiation
• Win-lose
−Competitive or distributive bargaining
−“Fixed sum game” perception
• Win-win
−Integrative or collaborative bargaining
−Expand the value or resources available to all participant
−Requires time, patience, and creativity

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 Win-Lose Negotiation

• Assume rigid negotiating positions

• Compete over a fixed amount of value
• Practice strict use of power by one party over another
• Pursue adversarial relationships

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 Win-Win Negotiation

• Understand each other’s needs and wants

• Focus on common ground rather than personal interests
• Conduct joint efforts to solve problems
• Develop creative solutions that provide additional value
• Engage in open information sharing

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 Win-Win Methods

• Expand the pie

• Logroll
• Use nonspecific compensation
• Cut the costs for compliance
• Find a bridge solution

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 International Negotiation LO8.4

• Added complexity and challenge with different …

− Languages
− Customs
− Laws
− Cultures
• Extra time and effort required
• Culture shock: Negotiators’ preexisting values, beliefs, rules and decision-
making schema are challenged
• May encounter substantial: anxiety, disorientation, confusion
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 International Negotiation LO8.4

• Barriers and obstacles

−Miscommunication because of language
−Time orientation
−Cultural differences
−Limited authority of foreign negotiators
• Need for knowledgeable translators
−Culture and language
−Industry and business concepts
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 Culture Shock LO8.4

• Negotiator’s preexisting values, beliefs, rules, and decision-making

schema are challenged
• Emotions run higher
• May encounter substantial
− Anxiety
− Disorientation
− Confusion

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 Characteristics to Overcome Barriers
LO8.4

• Extreme patience
• Thorough knowledge of agreement
• Honest and polite attitude
• Familiarity with foreign cultures and customs
• Recognize that common words may have different meanings, even between
similar countries or cultures

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 LO8.4

Caveats when Negotiating Overseas

• Don’t think that everyone else thinks and negotiates like you do
• There is danger in stereotyping or oversimplifying the interpersonal
characteristics of other cultures
− There is always substantial interpersonal variation within any culture
− However, there are often general tendencies

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LO8.4????

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 Impact of Electronic Media on Negotiations
• Electronically-based negotiations tend to equalize differences between parties
− Normal visual and auditory clues are diminished or not readily apparent
− Status differences and social differences are less discernible(ít rõ ràng hơn)
− Problem of being anonymous

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 Impact of Electronic Media on Negotiations
• E-negotiations take more time than face-to-face negotiations
• Outcomes tend to be less satisfying
• E-negotiations are more impersonal and do not promote rapport
• Interchange is often more aggressive and less diplomatic
• Messages are often misconstrued and taken out of context

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 Impact of Electronic Media on Negotiations
• Negotiators tend take more risks
• Real time vs. asynchronous- không đồng bộ
• Loss of information richness
• More difficult to provide feedback and conduct active listening
• E-negotiators ask fewer questions and tend to make more assumptions
• What does “silence” mean?

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 Mitigating the Negative Effects
of Electronic Negotiation
• Conduct an initial face-to-face meeting to build rapport
− At a minimum, have an extended telephone conversation
• Take extra time to carefully reread and edit e-mails before sending them
− They are irretrievable and can be easily forwarded to others
− Double-check “to:” and “cc:” addresses

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 Mitigating the Negative Effects
of Electronic Negotiation
• Use generally accepted e-mail protocols
− Clear, concise language
− No all caps, excessive punctuation symbols, underlining, bolding, italics, or
“off-the-cuff” comments
• Don’t copy e-mail to recipient’s superiors
− Perceived as you not trusting the recipient

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 Effective E-Negotiating Practices
• Use a blended negotiation
• Share relevant personal information initially
• Establish common ground
• Use emoticons ;<)
• Summarize agreements and concessions frequently

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 Effective E-Negotiating Practices
• Include positive language addressing the importance of the relationship
• Maintain a folder of the correspondence
• Know when and how to reply to or forward electronic correspondence
• Proofread the entire message before sending
• It will always take longer

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