fact based negotiations (fbn) - north carolina based... · 2018-06-19 · •spot buying •as they...

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Fact Based Negotiations

(FBN)

Negotiations Options

There are multiple negotiation approaches, however today

we will be focusing on fact based negotiations (FBNs).

Basic Negotiations

• Spot buying

• As they come

• Simple price requests

Speed Sourcing

• Price alignment

• Supplier rationalization

• Volume consolidation

• Request for Quotation

Strategic sourcing approach

•

Strict methodology, TCO based, X

teams•• Request for Proposal

•

Management

Ben

efi

ts/C

os

t R

ati

o

Time (months)

> 6 6 4 2

5

•

•

•

Speed Negotiations

• Price alignment

• Supplier rationalization

• Volume consolidation

• Request for Quotation

• Auction

FBN Negotiations

• Strict methodology, TCO based,cross-functional teams

• Thorough internal / external analysis

• Request for Proposal

• Implementation planning and

savings management

5

0

2

2

FBNs rely on data and analytics to effectively communicate the buyer’s key messages, rather than relying on personal dynamics and style.

FBN Differences

• Buyer and supplier

representative have a

one-to-one relationship

• Outcomes heavily

impacted by personal

dynamics and style

• Objectivity difficult to

maintain

• Negotiations focused on

single issue - price

• Buyer and supplier represented

by a team with a range of

expertise

• Outcomes dependent on data

and facts presented

• Objectivity promoted by

multiple points of view

• Negotiations take more

interests in the larger picture

(e.g., TCO, technical capability,

supplier diversity, services, etc.)

• Neutralize power

imbalance

• Reduce “hidden” agendas

from negotiations

• Foster stronger

relationship with fewer

suppliers

• Achieve lower TCO and

higher gross profit

Traditional Negotiation FBN Desired Outcomes

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FBN Steps

Create Negotiation Strategy

• Organize facts• Consider internal and supplier levers

• Discuss internal and potential supplier issues to address (topics)

The FBN process can be divided into 4 steps with a primary focus on organizing facts and preparation.

Define Negotiation Approach

• Establish internal and potential supplier goals and contract requirements

• Compose key messages and establish your MSS, LAS, and BATNA

• Develop negotiation tactics

Plan Negotiation

• Define R&R• Establish meeting plan

• Finalize FBN Plan

Execute Negotiation

• Conduct negotiations

• List open issues and next steps

• Create document agreement (contract)

Step 1 Step 2 Step 3 Step 4

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3

Negotiation Strategy:

Organize Facts

Industry Data

Market AttractivenessIndustry CompetitionPorter’s Five Forces

Supplier Relationship

Purchase VolumesMargins/ProfitabilitySupplier Compliance

Supplier Financial Data

Media CoverageAnnual ReportsFinancial Stability

Economic Data

Freight ChangesLabor RatesCommodity Prices

Fact-based “packages” based on the information collected

from the internal and external profiles plus RFx market

information should be created to “arm” the negotiating team

with the facts necessary to reach the desired outcomes.

Assembly of Negotiations Facts

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Understanding the market conditions and price changes can

provide helpful insights when negotiating with suppliers.

Supplier Price Index Illustration

Actual

Increase

Justified

Increase

Requested

Saving

24.2% - 5.4% = 18.8%

Actual increase

in supplier’s

price

Justified increase

based on cost

structure

Supplier Price Industry Wholesale

Season Index Index

S96 100.0 100.0

W97 102.5 99.8

S97 110.3 103.1

W98 110.3 103.1

S98 124.2 105.4

Total Change + 24.2% + 5.4%

Annual Change + 12.1% + 2.7%

90

100

110

120

130

S96 W97 S97 W98 S98

Supplier Average Increase: 12.1%

Industry Average

Increase: 2.7%


Market Conditions

6Hockey Stick & Silent Slope http://www.propurchaser.com/Home/ABetterWayModules?module=1

http://www.propurchaser.com/Home/ABetterWayModules?module=1

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Life Cycle Analysis

Where is the price the highest?

Where is the price the lowest?

Knowing the life cycle positioning can help in understanding

the impact to pricing.

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New

Product

Growth Maturity Decline

Life Cycle Analysis


Learning Curve Impact

• The learning curve states that for every doubling of

cumulative output, there is a set percentage reduction in the

amount of inputs required.

• Recognize that people (and often equipment) become more

productive over time due to learning and continuous

improvements.

• Quick improvements early on, followed by more and more

gradual improvements.

• Estimates of effective capacity and pricing must consider

learning effects!

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In addition, the learning curve should be used as part of your

pricing negotiation strategy, especially in the early stages.

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Capacity Effects

Available capacity can also be a major determinate of pricing,

receptiveness, and supplier relationship.

Capacity

Capacity

Utilization

Supplier A

Capacity

Capacity

Utilization

Supplier B

60%

90%

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Which supplier is hungrier?

How might this effect the supplier’s pricing strategy?


Relationships

The sourcing portfolio analysis also provides input into the

negotiation strategy.

Critical focus on the strategic

relationship, win-win negotiation;

long term contract

Bottleneck focus on supply; strategic

relationship while in bottleneck;

improving capabilities; medium

term contract

Leverage focus on maximizing commercial

advantage; leverage

competition, transactional

relationship, short to medium

term contract

Routine focus on efficiency; reduce

supply base, transactional

relationship, use long term

contracts 10

High

Low

Low High

Bottleneck

Routine Leverage

Critical

Value Potential

Complexity

/ Risk

Impact

Sourcing Portfolio

Analysis

Relationship

Focus

Transaction

Focus

Relationship

Focus

Transaction

Focus

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Define Negotiation Approach Key Questions

• What are our key messages?

• What is the maximum value we expect to achieve through

negotiations?

• What is the very least we are willing to agree to?

• What if we cannot meet our objectives during negotiations?


Step 1


Step 2

Plan Negotiation

Step 3

Execute Negotiation

Step 4

Next we should define the negotiation approach.

Define

Negotiation Approach

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Negotiation Approach:

Key Messages

Key messages that support your negotiation position and sourcing strategy should drive the direction of the discussion.

Key MessagesLooking to award and commit to larger volumes of work with fewer contractors.

Unit based pricing business model will be implemented

Want to be a leader in the utility industry.

Capable of performing majority of work.

Will reduce supply base and develop a limited group of preferred suppliers.

Interested in developing long-term mutually beneficial relationships and building strategic alliances.

Will develop an efficient contract management process that will reduce contract costs and facilitate quick awards.

Promoting and living "safety" is critical to us and the supply base.

Supplier diversity remains a core objective . Need to promote subcontracting to reach diversity goals.

Quality of service from Bidder is paramount. Bidder must be able to mobilize quickly, efficiently and in a cost effective manner.

Interested in moving away from transactional based contracting to a more strategic approach.

Construction Services Team empowered to award contracts to a limited supply base.

Bid awards will be predicated on TCO, Quality/Capability, Diversity, Service, Safety and Compliance to Terms and Conditions.

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Our Strategic Levers Supplier A Strategic Levers Potential Counter Levers

• The majority of their buyers are our size

• We are committed to get another supplier

• Supplier A should see increased competition, especially in terms of value-added services

• We are committed to taking calculated risks to further the business

• We can potentially outsource the purchase to a 3rd party or further integrate the process if required

Apply some creative techniques to develop counter levers designed to diffuse their position of leverage. If possible, these counter levers should be worked into the negotiation process so the supplier becomes aware of your position.

• Your company is a small part of supplier A’s business

• Supplier A has higher quality standards, justifying high price

• There are few good suppliers to choose from

• Your company’s switching costs are too high

• Your company has too few options on this purchase

• We are a large volume buyer

• This is a commodity purchase, many suppliers exist

• We are interested in long term supplier relationship

• We have vast knowledge of the supplier’s industry, competitors, and key price drivers

• We are a stable, growing business, who expect to increase our purchases over time

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Negotiation Approach:Key Levers


Stake Out the Positions on Each Issue

WANTS

NEEDS

ALTERNATIVES

Maximum SupportableSolution (MSS)

Least AcceptableSolution (LAS)

Best Alternative To Negotiated

Agreement (BATNA)

Objective:The altogether best proposal based on overall benefits and viability of alternative

Bottom Line:The company’s bottom line

Switching Strategy:Course of action we will pursue if the viable suppliers are not willing to agree to our bottom line

Negotiations Boundaries

We also need to develop goals and objectives for the negotiations. Three critical areas to establish are:

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• Barring the emergence of a better option, settling for anything less than this is not a viable business option

• This is the minimum we can agree to without sacrificing our business interests

• We should never agree to any solution less than this without very careful consideration of our BATNA

• We will never get more than we ask for

• Aspiration level is one of the most important factors in determining success

• Be ambitious, however have a defensible rationale

• MSS is independent of what the other party will accept

• MSS is an opening, not a closing proposal

• BATNA is not the same as our least acceptable solution or our bottom line

• What will we do if we cannot get a mutually acceptable agreement, e.g., alternatives in the event of a deadlock or unsuccessful agreement

• A BATNA is a unilateral action on the company’s part

• A BATNA helps the company:

• Assess more realistically your relative power

• Make sure that you do not settle at any cost


MSS, LAS, BATNA on Each Issue

A MSS, LAS, and the BATNA should be developed for each issue drawing on information from the analysis completed earlier.

Maximum Supportable Solution (MSS)

Least Acceptable Solution (LAS)

Best Alternative To Negotiated Agreement (BATNA)

Negotiation Boundary Guidelines

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Plan Negotiation Key Questions

• What roles will each team member play during negotiations?

• Where should negotiations be held?

• What other logistical considerations are important for

negotiations?


Step 1


Step 2

Plan Negotiation

Step 3

Execute Negotiation

Step 4

Step 3 is to plan the negotiation.

Plan Negotiation

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Plan Negotiation

1. Determine WHO should be

involved in the negotiation

2. Identify WHEN the negotiation

should take place

3. Determine WHERE the

negotiation should take place

4. Determine HOW the negotiation

should take place (format)

5. Hold preparatory review

meetings before each scheduled

negotiation in order to build

confidence in the process and

determine / confirm roles and

responsibilities

Who When

Where How

PLAN

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Step 1


Step 2

Plan Negotiation

Step 3

Execute Negotiation

Step 4

Finally we are ready to negotiate.

Execute Negotiation

Execute Negotiation Key Questions

• How do negotiations with suppliers progress?

• What are the next steps after supplier selection?

• What scenarios are presented as part of the bid award recommendation?

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Execute Negotiation

Although the number of iterations of negotiations varies by material, service, and/or supplier, the process can be described in four steps.

Try to make the supplier understand the needs and seek to fully understand the supplier’s offer

Discuss open points and present business imperative

Measure impact of offer against business requirements

Further negotiate and finalize agreement

Report on the open points discussed

New proposal

Report on the open points discussed

New proposal

Negotiation Execution

Step 1 Step 2 Step 3 Step 4

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Execute Negotiation

We need to communicate our objectives as well as address points for clarification.

• The lead presents the agenda and goes through the proposal (following the sequence of the RFx)

• Questions are asked and clarifications are given in both directions

• Indicate that not every supplier will be invited for a second round

• Give feedback on the supplier’s commercial position to allow the supplier to improve their proposal

• Appoint a person to record supplier comments and reactions and send notes to the supplier after the meeting

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Execute Negotiation

Next, more detailed discussions are conducted to begin to clarify open issues and start to seek agreement to the issues.

• Systematically discuss the outstanding points. Do this again -RFx chapter by chapter, as during the first meeting

• Present the negotiation case; the goal is to achieve the most favorable result (MSS)

• Be prepared to call a break in the meeting in order to evaluate the situation should a counter-offer be received

• Obtain business requirements sign-offs by both parties as agreement on each is reached

• Make orderly concessions – give and get

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Execute Negotiation

Supplier responses and additional proposals are then analyzed and considered. Finally, the buyer and the selected supplier(s) agree to key SLAs, OR if no supplier is selected, the team moves on to the BATNA.

• Assess the results of the previous meeting(s) and review the commercial conditions

• Obtain business requirement sign-offs by both parties as agreement on each is reached

• Agree on indices and key performance indicators that will become the basis for future negotiations

• Establish the frequency of future supplier reviews and SLA meetings

• If the minimum business requirements cannot be achieved, be prepared to switch to BATNA

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Q & A

• Questions?

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fact based negotiations (fbn) - north carolina based... · 2018-06-19 · •spot buying •as they...

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