Purchase Negotiation

1
The Medley Presentation From Chapters 11-14
IDIS 424 Spring 2004
2

• Chapter 11

• Worldwide Sourcing
• IDIS 424
• Spring 2004

3
International versus Global Sourcing

• What is the difference between international
  purchasing and global sourcing?
• International purchasing is the process of buying
  goods and services from suppliers outside your
  firm or business units country of operation
• Global sourcing refers to the proactive
  integration and coordination of material and
  service requirements across worldwide business
  units, looking at common items, processes,
  technologies, designs, sourcing practices, and
  suppliers

4
Key International Purchasing Issues

• International purchasing topics
• Culture
• Language and communication
• Law
• Total or landed cost
• Organization
• Risk management, including currency risk
  management
• Countertrade
• Sources of international information

5
Law

• The U.S. uses common or case law, which leads to
  lengthier and more detailed contracts than are
  found in countries that use code or civil law
• Many foreign countries do not like to deal with
  U.S. law and long contracts
• Bribery (facilitating payments) and reciprocity,
  while illegal in the U.S., are often not illegal
  oversees
• Have a written and signed document that describes
  the expectations of the buyer and seller. It
  does not have to look like a U.S. contract

6
Law

• Advanced, industrial countries have legal systems
  that can be trusted to treat foreign companies
  fairly. Developing countries may not
• There is no effective legal protection in many
  countries against intellectual property piracy.
  Perform a thorough reference check of prospective
  suppliers
• True international contracts exists if they
  follow the Convention on the International Sale
  of Goods (CISG). The U.S. has signed this
  convention

7
Total Cost

• Total cost in international purchasing is also
  called landed cost
• International purchasing may include many
  additional cost components compared with domestic
  purchasing
• Unit price
• Tooling
• Packaging
• Transportation
• Duties/tariffs
• Insurance premiums

8
Total Cost

• International purchasing may include many
  additional cost components compared with domestic
  purchasing
• Payment terms
• Fees and commissions
• Port terminal and handling fees
• Customs broker fees
• Taxes
• Communication costs
• Payment and currency fees
• Inventory carrying costs

9
Currency Risk Management
Delivery-Triggered Adjustment Clauses
A contract for 3000 castings with Nippon Steel is
issued on June 1, with delivery of 1000 castings
to be on June 30, July, 30 and August 30. A
currency adjustment clause is written into the
contract establishing a base exchange rate of 100
yen per dollar /- 4.
Upper Boundary
104 Yen/
100 Yen/ base
Currency Range
96 Yen/
Lower Boundary
June 30 Yen appreciates to 90 yen per dollar.
What should happen?
July 30 Yen is 97 yen per dollar. What should
happen?
August 30 Yen moves to 100 yen per dollar. What
should happen?
10
Currency Risk Management
Time-Triggered Adjustment Clauses
An annual contract for castings is agreed to with
Nippon Steel. A time triggered currency clause
is agreed to with reviews to be made quarterly.
The base exchange rate is 100 yen per dollar /-
4. Adjustment review dates are April 1, July 1,
and October 1.
Upper Boundary
104 Yen/
100 Yen/ Base
Currency Range
96 Yen/
Lower Boundary
April 1 Yen appreciates to to 95 yen per dollar.
What should happen?
July 1 Yen moves to 99 yen per dollar. What
should happen?
July 30 Yen depreciates to 106 yen per dollar.
What should happen?
11
Currency Risk Management
Currency Hedging - Forward Exchange Contract
A buying firm purchases 300,000 French motors on
September 1 at a cost of 4 francs each. Delivery
and payment will occur on December 1. Total
contract requires payment of 1,200,000
francs Buyer takes no steps to protect contract
from currency fluctuation Exchange rate on
September 1 1 franc .1530 Expected total cost
of contract on September 1 (300,000 x 4 x
.1530) 183,600 Exchange rate on December 1 1
franc .1820 Expected total cost of contract on
December 1 (300,000 x 4 x .1680)
201,600 Contract price increased 10 due to
currency changes
12
Currency Risk Management
Currency Hedging - Forward Exchange Contract
A buying firm purchases 300,000 French motors on
September 1 at a cost of 4 francs each. Delivery
and payment will occur on December 1. Total
contract requires payment of 1,200,000
francs Buyer purchases a 90 day forward exchange
contract Exchange rate on September 1 1 franc
.1530 90 day forward rate is 1 franc .1545
Expected total cost of contract with 90-day
forward rate lock-in (300,000 x 4 x .1545)
185,400 plus bank fees
13
Sources of Information
Where do we find information about worldwide
suppliers?

• International industrial directories
• Trade shows
• Trading companies
• Internet
• External agents
• Trade consulates
• Internal sources
• Sales brochures and catalogs

14
Global Sourcing Benefits

• Purchase price decreased 15 on average
• 87.6 of firms report that purchase price
  declined
• 9.9 report no change
• 2.5 report that purchase price increased
• Total cost of ownership improved 11 on average
• 72.7 of firms report that total cost of
  ownership declined
• 24 report no change
• 3.3 report that total cost of ownership increased

Purchase Price
Total Cost of Ownership
15
Global Sourcing Benefits

• Supplier quality improved 6 on average
• 42.6 of firms report that supplier quality
  improved
• 54.1 report no change
• 3.3 report that supplier quality decreased
• Delivery cycle time lengthened 5 on average
• 23.3 report that delivery cycle time shortened
• 34.2 report no change
• 42.5 report that delivery cycle time lengthened

Supplier Quality
Delivery Cycle Time
16
Global Sourcing Benefits

• On-time delivery performance improved 3 on
  average
• 32.3 of firms report that on-time delivery
  performance improved
• 46.7 report no change
• 21 report that delivery performance worsened

On-Time Delivery Performance
17
Chapter 12

• Purchasing Tools and Techniques
• IDIS 424
• Spring 2004

18
Standard ANSI Process Flow Chart Symbols
Operation
Decision
Inspection/ Approval
Transport
Storage
Delay
19
ANSI Process Flow ChartStores Requisition
Process
User Completes Requisition
Clerk Enters Order
Wait in Internal Mail
Deliver to Stores
Wait in Stores In-Box
In Stock?
Pick Order
Y
N
File Requisition
Check Order
Deliver to User
Notify User
20
Process Flow Charting - Considerations

• Document the process as it IS, not as its
  supposed to be
• Scope - how much of the process do you want to
  look at?
• Detail - how finely do you want to break down the
  process?

21
Process Flow Charting - Considerations

• Additional dimensions may be included in a flow
  chart
• Information flows
• Time element
• Operations, inspections, delays, transports
• Average and range (or maximum)
• Distance moved
• Resources required
• Capacity

22
Process Flow Charting - Benefits

• Gain a clear understanding of how the process
  actually works
• Capacities
• Cycle times
• Highlight potential improvement opportunities
• Unnecessary steps
• Redundant steps
• Inefficient sequencing of steps
• Identification of bottlenecks

23
Value Analysis

• What is value analysis?
• The organized and systematic study of every
  element of cost in a part, material, process, or
  service to make certain it fulfills its function
  for the customer at the lowest total cost. It
  employs techniques which identify the
  functionality the user wants from the part,
  material, process or service
• Value Function/Cost
• Function is what a part, material, process, or
  service does (noun and a verb)

24
Value Analysis

• What is value analysis?
• VA is a continuous improvement technique--it is
  not product or service cheapening!!
• VA workshops and the VA process are a combination
  of group problem solving, project management,
  process redesign, and continuous improvement
  efforts
• Applies to manufacturing and non manufacturing
  organizations
• Value analysis requires inter and intra
  organizational integration!!

25
Value Analysis
Value Analysis Workshop Steps
Information Phase
Speculative Phase
Analytical Phase
Execution Phase
Conclusion Phase
26
Chapter 13

• Strategic Cost Management
• IDIS 424
• Spring 2004

27
Cost-related Concepts

• A cost driver is any factor that affects costs.
  A change in the cost driver will cause a change
  in the total cost
• Cost management are actions that managers take to
  satisfy customers while continuously reducing and
  controlling costs

28
Cost Behavior

• Cost behavior refers to the way costs change with
  respect to a change in an activity level or cost
  driver
• Typical cost behavior patterns include
• Fixed costs
• Variable costs
• Mixed costs
• Semifixed costs
• Semivariable costs

29
Cost Behavior Patterns

• Fixed costs are costs that do not change with
  changes of a cost driver
• Variable costs are costs that increase directly
  and proportionately with changes of a cost driver
• Mixed costs are costs that have both a fixed and
  a variable component

30
Framework for Cost Management
High Risk Low
Unique Products
Critical Products
Generics
Commodities
Low High Value (Cost, Service, Administration)
31
Generics

• Low Value, Low Risk
• Strategies
• Standardize / consolidate
• Critical Factors
• Reduce cost of acquisition
• Metrics
• Total Delivered Cost Reduction
• Percent of CGS Improvement
• Transportation cost reduction

32
Commodities

• High Value, Low Risk
• Strategies
• Leverage preferred suppliers
• Critical Factors
• Reduce cost of materials
• Metrics
• Price change improvement to market index

33
Unique Products

• High Risk, Low Value
• Strategies
• Preferred suppliers
• Critical Factors
• High costs when cost/quality problems occur
• Metrics
• Unit price cost reduction - Actual to actual
  prices for same items
• Target prices achieved, Should cost
• Total Delivered Cost Reduction

34
Critical Products

• High Risk, High ValueStrategies
• Strategic supplier partnerships
• Critical Factors
• High costs when cost/quality problems occur
• Metrics
• Target prices achieved
• Unit price cost reduction - Actual to actual
  prices for same items
• Joint cost savings sharing

35
Chapter 14

• Negotiation
• IDIS 424
• Spring 2004

36
Purchase Negotiation

• Negotiation Overview--
• Negotiation is a process of formal communication,
  either face to face or via electronic means,
  where two or more people come together to seek
  mutual agreement about an issue or issues
• The process involves the management of time,
  information, and power
• It is a time-consuming process that requires
  extensive planning and a commitment of
  resources--90 of the negotiation process
  involves preparation, not execution

37
Purchase Negotiation

• Negotiation Overview--
• Negotiation involves relationships between
  people, not just organizations
• The primary objective of a purchase negotiation
  is to reach an agreement that satisfies both
  parties
• Negotiation is an opportunity to create value
  within the supply chain
• Good negotiators are not born--they develop their
  skills through practice

38
Negotiation Framework
Identify or Anticipate a Purchase Requirement
Determine if Negotiation is Required
Purchase negotiation involves a five-step process
Plan for the Negotiation
Conduct the Negotiation
Execute the Agreement
39
Negotiating Tactics
Examples of Tactics
Low Ball
Honesty/Openness
Planned concessions
Price Increase
Best and Final Offer
Silence
Scarcity
Strong Initial Offer
Use of power
High Ball
Phantom Quotes or Offers
40
Win-Win Negotiation

• Characteristics of win-lose negotiation--
• Rigid negotiating positions
• Argument over a fixed amount of value
• Strict use of power by one party over another
• Adversarial competition played out at the
  negotiating table

• Characteristics of win-win negotiation--
• Parties try and understand each others needs and
  wants
• Parties build on common ground and work together
  to develop creative solutions that provide
  additional value
• Primary use of power is to focus on common rather
  than personal interests
• Likely to engage in open sharing of information

41
Win-Win Negotiation

• Win-win negotiation applies only to certain
  situations--
• Strategically important items or services
• Trust between parties exists
• Both parties endorse a win-win approach
• Discussion Question How does a negotiator know
  when his or her counterpart is taking a win-win
  approach?

42
Negotiation Conclusions

• Successful purchasing negotiators share some
  common attributes--
• They realize that training, planning, and
  practice are required to become an effective
  negotiator
• They have higher negotiating goals and
  aspirations than their counterparts
• They are destined to be among an organizations
  most valued professionals