D4 - Negotiating and Contracting in Procurement & Supply Flashcards
1
Q
Why are specifications required when contracting?
A
- Define the requirement: must be a clear list of requirements for the seller to understand.
- Gain buy in: from the outer business.
- Communicate: Must make clear the work to be delivered so the supplier can price accurately.
- Minimise risk: avoids misinterpretations
- Facilitate Evaluation: Allows you to benchmark suppliers performance.
- Standardisation: allows you to standardise products bought across different companies.
2
Q
What are the 2 types of sepcification and what is the difference between them?
A
- Performance specification: details the desired results
2. Conformance specification: details exacting perameters around delivery and execution.
3
Q
What are the two main approaches to tendering?
A
- Open tendering: publicly advertise the work
2. Restricted tendering: prequalify a list of suppliers and invite them to privately tender.
4
Q
What is meant by implied terms and explicit terms?
A
Contracting can have either implied or explicit terms. Implied terms are assumed based on law or another term within the contract. Explicit terms are stated clearly within the document.
5
Q
Contract terms can be split into two categories, condition or warranty. What is meant by these categories?
A
Conditions are essential terms to the contract and to break them is considered a breach of contract.
Warranties are less serious and a failure to deliver may not constitue a breach of contract although the other party may stil claim.
6
Q
When measuring performance of a service contract it is sometimes useful to use what kind of agreement?
A
Service level agreement which will set the desired service levels e.g. toilets will be cleaned every 10 hours.
7
Q
What 5 parts must exist to make a contract?
A
- Consideration - both parties must get something out the agreement.
- Offer - one party must offer the other something.
- Acceptance - the other party must accept the offer.
- Intention - to create a legally binding contract
- Capacity - to make the contract legal.
8
Q
What methods could be used to accept a contract?
A
- Oral or written communication confirming acceptance.
- Unconditionally - acceptance must be in complete agreement of the entire contract.
- By performace - starting to deliver work under a contract can count as acceptance of a contract
9
Q
What is meant by consideration and what must be considered before making a legally binding contract?
A
- The contract must offer something of value from both parties to the other.
- The law is concerned with whether the value is sufficient.
10
Q
What are the risks of intention to create a contract for procurement professionals?
A
Intention is a requirement for contracts which is generally deemed accepted when entering into contractual relationships.
11
Q
What is meant by capacity to create a contract?
A
Having the capacity can mean, is the person old enough e.g. nobody under 18 has the capacity to create a contractual relationship. Another example is whether an employee has the right to act on behalf of a company.
12
Q
Why is it high risk to enter into oral contracts?
A
- Perceptions of the contractual arrangements may be different.
- Where a mistake is deemed to have taken place the contract may be void.
- Transparency can be vital for disputes and lead to mistrust if there isn’t any documentation.
- Conflict may arrise through lack of clarity on the agreed terms.
- Compliance will be difficult to measure with no written contract.
13
Q
What considerations must be taken when trading internationally?
A
- Jurisdiction: where will disputes be settled?
- Applicable Law?
- Language of contract?
- Customs and practice considerations.
- Currency fluctuations
- Documentation requirements may differ.
- Taxation may be different from country to country.
14
Q
What is negotiation?
A
It is a process which involves more than one party trying to reach an agreement.
15
Q
Why should conflict be avoided in negotiations?
A
- It may distract away from the main task.
- Polarise views and create tension.
- Act as a barrier to effective communication.
- Encourage adversarial behaviours.
- Lead to emotional reactions.
16
Q
What is distributive negotiation or integrative negotiation?
A
Distributive negotiation is win/lose
Integrative negotiation is win/win
Negotiations can be lose/lose if it rushed and neither party get what they want out the agreement.
17
Q
How can you plan for a negotiation?
A
MIL - must haves, intend to have, like to have. categorise all points which aren’t agreed and decide on the importance.
18
Q
What is meant by walkaway?
A
A walkaway is the point at which the deal is no longer worth making. This will depend on things like
- are there other suppliers who can deliver?
- how urgently do you need the goods / services?
- how easy is it to switch to other suppliers?
19
Q
What is meant by a BATNA?
A
Best alternative to a negotiated agreement is your back up plan. This will be important as it will provide leverage.
20
Q
What is power and what are the different styles which it can be used?
A
Power is the ability to influence people. It can take many forms:
- Overt power, the obvious and transparent use of power
- Cover power, more subtle use of power through implication
- Structural power, represents power through relationships.
21
Q
What are sources of power?
A
- Legitamite (exert power based on the beliefs of others)
- Expert (being an expert in an area)
- Reward (through offer of inscentive)
- Referent (through charisma or personality)
- Coercive (threaten sanctions)
- Informational (through access to information)
- Personality (through being personable)
- Position based (pulling rank)
- Relationship based (ability to control resource)
- Contextual (understanding a batna)
22
Q
Describe Cox et Als power matrix
A
Buyer power relative to the supplier is on the y axis, and suppliers power relative to the buyer is on the x axis.
Buyer power is high, supplier power is high (Interdependence)
Buyer power is low, supplier power is high (Supplier dominance)
Buyer power is high, supplier power is low (buyer dominance)
Buyer power is low, supplier power is low (independence)
23
Q
What are sources of information when planning for a negotiation?
A
- Networking (supplier / buyer events)
- Published Information (media, trade journals etc)
- Internet sources (search engines)
- Internal sources (People who have worked with the organisation previously)
24
Q
Describe different types of relationships from the competitive end through to the collaborative end of the spectrum.
A
- Adversarial
- Arms Length
- Transactional
- Closer tactical
- Single-sourced
- Outsourcing
- Strategic alliance
- Partnership
- Co-destiny
25
Why might a relationship breakdown?
Bad communication, unrealistic expectations, change in external environments, disputes
26
When negotiation fails to settle disputes or revive relationships what are the next steps?
Conciliation or Meditation
then
Arbitration or Litigation
27
Describe cost, price and profit.
Price (the amount charged to the buyer) = Cost (the amount it costs the supplier for the materials) + Profit (The amount of money gained by the supplier for the sale)
28
What techniques can be used for Price assessment?
1. Price reduction
2. Profit assessment
3. Cost analysis
4. Break even check
29
What is the difference between direct and indirect costs?
Direct costs relate directly to the product being sold. An impact on quality of anything under direct costs will have an impact on the overall quality of the end product.
Indirect costs are overheads and non end product related costs e.g. lighting or machinery.
30
What is the difference between fixed costs and variable costs.
Fixed costs will not change dependent on the amount of produce created. The costs are usually regular payments.
Variable costs are directly related to the products and an increase in sales will see an increase in variable cost.
31
How can you calculate a suppliers break-even point?
Take the variable costs from the sales revenue to get the contribution. Then divide this by the volume of sales to get the contribution per unit. Then you divide the fixed costs by the contribution per unit to work out the amount of units which must be sold.
32
Name 3 costing methods
1. Marginal Costing
2. Absorption Costing
3. Activity Based Costing
33
What is marginal costing?
The variable costs are covered by the price but no fixed costs are. Fixed costs must be recovered elsewhere.
34
What is absorption costing?
The variable costs and a reasonable portion of the fixed costs are covered by the price.
35
What is activity based costing?
All costs are allocated to a specific product or brand including the fixed overheads.
36
What is the difference between mark-up and margin?
Mark-up is the profit as a % of the cost.
| Margin is the % of price which is profit.
37
What makes up the micro environment?
1. Suppliers
2. Distributors
3. Customers
4. Competitors
38
What are porters 5 forces of competition?
1. Buyers bargaining power
2. Suppliers bargaining power
3. Threat of new entrants
4. Threat of replacement products
5. Market rivalry
39
What elements make up the macro environment?
```
S - Social
T - Technological
E - Environmental
E - Economic
P - Political
L - Legal
E - Ethical
```
40
What is meant by SMART objectives?
```
S - Specific
M - Measurable
A - Achievable
R - Relevant
T - Timely
```
41
What is the difference between positions and interests?
Positions are what you want out of the negotiation and focus around positions is a distributive approach to negotiation.
Interests are why you want something and focus is around achieving interests. Focus on interests is an integrative approach to negotiation.
42
What other preperation might you do before a negotiation?
1. Set the agenda
2. Agree a date and time
3. Agree a location
4. Agree duration
5. Agree attendees and roles
6. Plan meeting room layout
43
What resources are required for a negotiation?
1. Time - for preperation as well as the meeting and any follow up.
2. Personnel - the relevant people to attend the negotiation.
3. Finance - budget must be available for the goods/services
4. Information - gathering and obtaining information is critical to a successful negotiation
5. Information Technology - ensure correct set up e.g for webinar
6. Space and facilities - flip chart, large enough meeting room, etc
44
Why is it better to host a negotiation rather than travel to it.
The "home advantage" is useful as you will be more relaxed in the environment. You will be less tired as you won't have travelled and have access to resources more easily. You can set the meeting room to suit your requirements etc.
45
What activities should you do in the pre-negotiation stage?
1. Data gathering and analysis
2. Stakeholder mapping
3. Power and dependency profiling
4. Identifying issues and priorities
5. Deciding on approach (integrative/distributive)
6. Evaluating power
7. Cost analysis
8. Setting objectives
9. Considering the negotiation variables (MIL)
10. Planning the logistivs
11. Understand walkaway / BATNA
46
What are the stages in the communication (main discussion) part of a negotiation?
1. Opening - set tone
2. Testing - check assumptions
3. Proposing - each party proposes solutions to problems
4. Bargaining - trading occurs between parties
5. Agreement - Both parties accept the offers being made
6. Closure - ratification
47
What should be done post-negotiation communication stage?
Follow up on formalities are complete and management arrangements are put in place. Also ensuring the contract is marked up after the meeting is essential.
48
What is the difference between influence and persuasion?
Influence can happen at any time, advertising influences us. It is something which shapes our views, understandings or beliefs.
Persuasion is the ability to change someone elses views understandings of beliefs and is used in negotiation.
49
What is the text book approach to negotiation stages?
Start by conditioning with threat, emotion or logic.
Then bargain with low value trade offs.
Then compromise to reach agreement.
50
What tactics can be used in a negotiation?
1. Good cop, bad cop
2. Nibble, add something small in just as the deal is about to be concluded
3. Snow job, give lots of irrelevant information to bog the other party down
4. Mother Hubbard, act like your on their side but have other constraints e.g. management or budget
51
What elements make up emotional intelligence?
1. Self awareness - Manage ones own feelings
2. Emotional resilience - Perform under pressure
3. Motivation - Driving for goals
4. Interpersonal sensitivity - Understand others feelings
5. Influence - Changing others views
6. Intuition - Read situations
7. Integrity - Building of trust and rapport
52
What types of questions can be used in negotiations?
1. Open - variety of answers can be given
2. Closed - yes or no
3. Hypothetical - something may not happen
4. Probing - request information on specific area
5. Leading - put an answer in their mouth
6. Multiple - used to put pressure on
53
What 3 elements make up communication and in what proportions?
1. 55% body language
2. 38% pitch we speak in
3. 7% what we say
54
How can cultural differences affect a negotiation?
1. Power distance, the extent to which the unequal distribution of power is accepted
2. Uncertainty Avoidance, how we respond to uncertainty and ambiguous or unexpected situations
3. Individualism-Collectiveness, the extent to which people focus on themselves and their family
4. Masculinity-Femininity, how gender values predominate society
5. Long term orientation, shorter or long term values?
55
EXAM: Explain 5 details that might be in an enquiry of RFQ (15)
1. Buyers contact details
2. Quantity of goods to be delivered
3. Place of delivery
4. Date of delivery or program
5. A unique reference number
6. Any terms and conditions which will apply to the purchase
56
EXAM: Give 2 circumstances in which it may be appropriate to use a performance specification (10)
1. Technology is moving fast in the area
2. Suppliers have great knowledge of the area
3. When there is a clear criteria for evaluating solutions
4. When the buyer has the time and expertise to assess the bids
57
EXAM: Describe 3 sources of power that can be used in a negotiation (15)
1. Legitimate power (authority)
2. Information power (presentation of data which changes view points
3. Expert power (knowledge is power!)
4. Referent power (Charisma, power because people want your approval)
5. Reward power (Carrot to give)
6. Coercive power (Stick to beat)
7. Personality
8. Contextual power (Understanding BATNA or walkaway)
58
EXAM: Explain the reasons that lead to a monopoly supplier having high power relative to a purchaser in a commercial negotiation (10)
1. Monopoly suppliers tend to be large organisations and there may be many buyers
2. Product might be highly differentiated with no other supply options
3. No threat of substitutes
4. The buyers purchase volumes may be insignificant to the seller
5. The suppliers product is important to the buyer
6. No opprotunity to go elsewhere because of specialisms
7. Switching or developing a new supplier may be too expensive
8. The suppliers reputation might make other products difficult to find.
59
EXAM: Examine 5 resources required for an effective face-to-face negotiation meeting (15)
1. Personnel (with right skills and knowledge)
2. Information (ability to bargain)
3. Meeting room and suitable space
4. Finance to pay for refreshments and/or travel
5. Time to prepare and hold the negotiation
6. Equipment such as projectors, phone in the room, flip chart and pens...
60
EXAM: Suggest 5 points that should be considered when preparing for a telephone
negotiation compared with a face-to-face negotiation (10)
1. There may be background noise which could affect peoples ability to hear
2. An agenda should be shared prior to the meeting
3. Preparing questions to help overcome the lack of non-verbal communication
4. Prepare strong cases or arguments as they may prevail more over the phone
5. Take steps to initiate the call as there tends to be a power advantage over the joiner
6. Preparing psychologically as there is pressure to reach a conclusion on a call
61
EXAM: Identify 3 types of non-verbal communication and explain why each is important in negotiation (9)
1. Eye contact (not making eye contact might show dishonesty)
2. Body positioning (slouching could show lack of attention)
3. Neuro-linguistic programming (mirroring could lead to an empathetic relationship)
4. Encouragement (Nodding shows interest)
5. Gestures (arms behind head being arrogant)
6. Cultural bias (dress code, hand shake etc)
7. Proxemics (how close one party wants to be to the other)
8. Facial gestures (raising eye-brows)
9. Silence
10. Tone of voice, speaking speed
11. Object language (the way the room looks)
62
EXAM: Explain the use of 4 different types of question (16)
1. Open questions for digging information
2. Closed questions for ratification of specific points
3. Probing questions for gaining clarity in a certain area
4. Multiple questions for putting pressure on
5. Leading questions for gaining acceptance
6. Reflective questions (you seem unhappy with the proposal) for bringing emotion into the negotiation
7. Hypothetical questions for opening up ideas
63
EXAM: Discuss 3 merits of performance specifications in commercial agreements (15)
1 . Quicker to write
2. Cheaper to write
3. Risks of non-achievment with the seller
4. Allow innovation
5. Buyer doesn't have to have knowledge of market
6. Potentially wider supply base
64
EXAM: Describe 2 circumstances in which it may be appropriate to use a conformance specification in a commercial agreement (10)
1. Medical / pharmacutical / chemical compound areas where the product must be correct
2. Blueprints or drawings have been designed
3. Construction contracts where the building must fit in a specific location
4. A recipe is used
65
EXAM: Examine 5 types of supplier relationships, within the ‘relationship spectrum’, that can impact commercial negotiations (25)
Adversarial, Arm's length, Transactional, Closer Tactical, Single-sourced, Outsourced, Strategic alliance, Partnership, Co-destiny
Focus on Intensity, mutuality, trust, commitment. Win/win or win/lose
66
EXAM: Explain direct costs (4)
Direct costs can be identified directly with a specific saleable unit of output. Examples include
raw materials and direct labour
67
EXAM: Explain indirect costs (4)
Indirect costs, otherwise known as ‘overheads’, are the costs that cannot be identified to a
specific saleable unit of output. Examples include administration and selling costs as well as machine consumables such as lubrication
68
EXAM: Explain fixed costs (4)
Fixed costs are costs that do not vary as output (production) might increase or decrease. Examples include factory rent and salaries
69
EXAM: Explain variable costs (4)
Variable costs are costs that will vary as production volumes change. Examples include raw materials and hourly paid labour related to output
70
EXAM: Suggest 3 reasons why it is important for a purchaser to understand a supplier's fixed and variable costs when preparing for a negotiation (9)
1. Understanding costs can help set the parameters for price negotiations
2. Other negotiation initiatives e.g. supplier development targets can be set
3. help understand minimum order quantities or economies of scale achievable
4. Understanding costs can help justify price increases
5. Understanding variable costs allows you to know the suppliers walkaway point
6. You can understand profitability or mark-up
7. Buyer could understand the suppliers breakeven
71
EXAM: Describe 5 proactive influencing tactics that might be used in negotiation (25)
1. Rational persuasion
2. Consultation (invite them to develop a solution)
3. Mother hubbard (no leeway)
4. Snow job (bombard information)
5. Threat, emotion or logic
6. Bargaining or compromising
7. Split the difference
8. Good cop/bad cop
9. Add ons (add things in at the end of the negotiation)
10. Salami tactics (split problems down)
11. Russian font (present two un paletable offers)
12. Take it or leave it
13. The nibble (ask for another thing as the deals about to conclude)
72
EXAM: Discuss 2 key performance indicators that could be used in a contract with a supplier, illustrate your answer with relevant samples (10)
1. Cost management
2. Quality performance
3. Timeliness of delivery
4. Service, promptness of dealing with issues
5. Resources available
73
EXAM: Explain 3 reasons why it may be more difficult to develop specifications in contracts for services rather than in contracts for goods (15)
1. Services are intangible (subjective)
2. Services are variable (each is unique)
3. Services are provided in real time
4. Must be performed in particular locations and may need specific locations detailed in the spec
74
EXAM: Outline 5 pre-conditions that are necessary for an integrative (win-win) negotiation to be successful (15)
1. Both parties believe there is a greater likelyhood of success by collaboration
2. Broadly shared goals
3. Parties are prepared to let go of the need for a pre-plan or control the outcome and and consider the redefinition of problems
4. Trust between the buyer and supplier
5. There is a willingness to communicate accurately and willingness to ask questions and share information
6. Both parties understand the benefits of collaboration and aren't held back by adversarial negotiators scared of sharing information.
75
EXAM: Explain with examples, 2 circumstances when a distributive (win-lose) approach to a commercial negotiation may be appropriate (10)
1. A particular point to the contract may be non-negotiable like health & safety
2. If one party has much higher bargaining power and the shareholders are willing them to use it
3. Where relationship building is less important than the results of the negotiation
4. Where the contract is low value to both parties
5. Limited time for a negotiation and both pushing for an acceptable position
76
EXAM: Variables are essentially the content issues for negotiation which determine its scope and focus.
Explain 3 variables that can be discussed in a commercial negotiation (15)
Price, Delivery, Contract terms, Quality, Specification, Transportation, Payment Terms
77
EXAM: For 1 variable which determines the scope of a negotiation, explain how a purchaser might set their objectives for the negotiation. (10)
1. Understand the bargaining mix
2. Linking variables
3. MIL analysis
4. Develop walkaway / BATNA
78
EXAM: Outline 3 elements of the opening stage of a negotiation (15)
1. Rapport building
2. Assertive communication (desired outcomes)
3. Using questions to gain information from the other party
4. Listening actively
5. Checking assumptions
6. Using signals to condition the other party
7. Creating an atmosphere conducive to agreement
79
EXAM: Explain the closure phase of a commercial negotiation (10)
1. Ratification, ensure everyone is clear what has been agreed in the meeting.
2. It provides a tool for stakeholder buy in to the negotiated agreement
3. It provides actions and responsibilities to take away from the meeting
4. The minutes or summary can be written into a formal document to avoid any disputes
5. Formally and mutually agreed points can be incorporated into the contract without further discussion.
6. Closure can allow the follow up of any outstanding points from the negotiation
7. It can assist the evaluation of the negotiation and outcomes
80
What pricing strategies are there?
1. Market Penetration (start low)
2. Market Skimming (start high)
3. Cost Plus (Costs of production calculated and mark up added)
4. Going rate (price similarly to the competition)
5. Buyer based (what the buyer will pay)
6. Captive pricing (high pricing because of monopoly)
7. Relationship pricing (price set to try and maintain long term relationship)
8. Premium pricing (High as your brand is reputable)
81
EXAM: Explain 3 requirements that an offer must fulfil in order to be legally valid (15)
1. Offer must be definite, unequivocal and unambiguous set of statements as a clear offer to sell (not a willingness to sell e.g. a catalogue)
2. The person making the offer must intend to be bound by it
3. The offer must be communicated successfully to the other party
4. The offer must be open (still valid) when the other party accepts it
5. The party offering must have the capacity to do so
82
EXAM Discuss 4 differences between distributive (win-lose) and integrative (win- win) approaches to commercial negotiation (16)
1. An integrative approach is working together to achieve an outcome however distributive approaches are aiming to get a win at the expense of the other party
2. Distributive negotiations will take a short term focus rather than thinking about the long term relationship
3. Openness and trust is a feature of an integrative negotiation
4. Positions tend to be inflexible in a distributive approach
5. Distributive approach is seen as competitive
6. If a distributive approach breaks down it is likely to end in dispute resolution
83
EXAM: Suggest 3 situations when a distributive approach may be appropriate for commercial negotiations (9)
1. When an issue is regarded as non-negotiable
2. If one party holds a stronger bargaining power
3. If the negotiation outcome is more important than the long term goals
4. For one-off transactional purposes
5. Where there is time pressure
84
EXAM: From a buyer’s perspective, outline the impact of 4 different market structures on commercial negotiations (20)
1. Perfect Competition (the buyer is in a powerful position because it is easy to change suppliers, there is no real distinction between suppliers and products, the buyer has a high level of information and understanding of products, buyers will be willing to encourage competition to drive prices down, buyer may be distributive in negotiation)
2. Imperfect or Monopolistic Competition (More complex structure with more variables other than price e.g. quality or delivery times, priorities need to be set against variables to choose a supplier, the power base is not so clear as perfect competition, negotiation is key)
3. Oligopoly (Buyers can focus on other aspects other than price as sellers avoid price competition, sellers may collude to keep prices high, buyers will need to be skilled and well prepared to achieve benefits, Buying consortia can restore some power balance)
4. Monopoly (The supplier can dictate the terms, the buyers only leverage is to develop another alternative, high prices in this type of market, the supplier has no incentive to tailor products to the buyers needs, an integrative approach to negotiation is required)
85
EXAM: Discuss 5 phases of a negotiation and suggest the activity that might take place at each stage (25)
1. Pre-negotiation stage (fall back)
2. Introductory supplier meetings (testing assumptions and exploring facts)
3. Discussion meetings (negotiation/trade/move/bidding)
4. Agreement meetings (summarise discussions)
5. Post-negotiation phase (finalise/implementation)
86
EXAM: Explain the nature and operation of a call-off contract (10)
Call-off contracts are sometimes called blanket orders, there is a contract put in place to buy a certain amount of a product over a period of time and then it is "called off" throughout the year. Similar to framework agreements except frameworks create many individual contracts whereas a call-off is only one contract.
87
EXAM: Suggest how the ‘battle of the forms’ may be avoided (15)
1. Agreeing and negotiating terms
2. RFQ or Enquiry used to get an offer from the supplier initiated on your terms
3. Counter signed PO's
4. Stamping delivery notes
Answer should be around creating offer and acceptance.
88
EXAM: Explain 3 reasons why a procurement organisation might attempt to analyse a supplier’s cost structure when preparing for a commercial negotiation (9)
1. Identify negotiable areas
2. Understand the suppliers walkaway position
3. Understand how much leverage to apply before supplier failure may occur
4. The buyer will know when the supplier can't go any further
5. The level of profit can be identified and deemed to be reasonable
6. Help develop your BATNA if profits are too high
89
EXAM: Explain 5 cultural differences between the parties to a negotiation that may impact on the negotiation process or outcome (25)
1. Power distance (if all decisions need to be made by the leader it could be a slower negotiation process)
2. Individualism Collectiveness (May want to negotiate on their own or in a team)
3. Masculinity Femininity (Masculine cultures may negotiate with a distributive approach)
4. Long Term orientation (Will they persevere despite it getting difficult? over fulfilling obligations to protect ones face)
5. Language differences (may slow down negotiations and create ambiguity)
6. Uncertainty avoidance (Likely to seek stable rules and procedures for the negotiation if uncomfortable with uncertainty)
