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Negotiate for Value: Reengineer Your Purchasing

OEMs must manage the value of their needs to get the most bang for their buck.

Considering the current challenging economy, getting the best deal in business transactions has become increasingly difficult. Professionals involved in design, manufacturing, or quality at medical device OEMs face mounting pressure to reap the best value for dollars spent on equipment or product development.

Whether the negotiations involve infusion pumps, rotary valves, or other products and systems, it is crucial not to focus only on dollars and cents. Value is more important than ever, even as the economy begins to recover, and should always be a priority.

Today’s economic climate demands that OEMs carefully value products and services. Consider all the suppliers that have been forced to cut prices and are struggling to deal with eroding margins. If the economy continues improving, those suppliers will be looking to raise prices. OEMs will need to know how to respond, so they can accurately value suppliers’ products and get what they need in the most cost-efficient way.

Negotiations must go beyond simple persuasion tactics, which can take up valuable time without giving either side the desired results. For example, while an OEM may be able to persuade a supplier to agree to a short-term price de-crease on a new manufacturing system, the OEM may lose out on additional service. A seller, on the other hand, may feel satisfied after persuading an OEM to pay 10% more for a system, but may lose out with only a short-term commitment.
In effective negotiations, both sides need to consider variables that are sometimes hard to value or aren’t typically seen as sources of leverage, such as product wear, performance, and service contracts. These are all part of the total value chain.

Considering the Total Cost of Ownership

When approaching negotiations with the total cost of ownership in mind, OEMs should consider the hard and soft costs of a purchase. Hard costs are tangible and easily accounted for. For example, the hard costs of thermally bonded tubing would include the purchase price, installation, maintenance contracts, and spare parts. Soft costs, on the other hand, are related to training, support, downtime, and other variables. Because they aren’t incurred at ac-quisition time, soft costs are often overlooked by buyers when developing budgets and underleveraged by suppliers when trading against hard-dollar variables. The failure to account for such costs can result in projects being delivered late, over budget, or with serious quality issues.

"When approaching negotiations with the total cost of ownership in mind, OEMs should consider the hard and soft costs of a purchase."

To analyze the total cost of ownership, buyers should interview the internal users (the project engineering staff devel-oping a new product for the market) and weigh the importance of all soft costs. The findings should reveal the users’ priorities, which could include high levels of performance, the availability of an extended service contract, or ready access to replacement parts. This will also enable the buyer to compare the competitive advantages of different suppliers. Answering these questions can increase an OEM’s power and leverage and should help lead to the correct purchasing decisions.

When to Involve the Procurement Department

The increasing complexity of negotiation strategies and the growing attention being paid to them underscores the im-portance of getting the procurement or purchasing departments involved early in the process. These departments serve a more vital function than ever, helping the buyer maximize value.

Procurement personnel should always be viewed as a resource rather than an impediment. OEMs shouldn’t make the mistake of viewing them as workers who simply issue purchase orders. Whether they are brought into the process ear-ly or late, they will put pressure on the supplier to extract savings, even if the deal is all but done. If procurement per-sonnel are brought in too late—if, for example, nearly all variables have already been decided—the demands of the procurement department may compel one or both sides to engage in persuasion or haggling—which can lead to a dead end.
As soon as the scope of work or specifications is discussed between the OEM and the supplier, the procurement de-partment should be involved. This will ensure that multiple variables are addressed early in the game. Well-informed procurement personnel can play a vital role in getting a deal done by raising key issues, asking pertinent questions that can move negotiations forward, and expediting the process once the order is placed. But if the procurement team is kept in the dark until a request for purchase dropped on its desk, they will not have time to help—and they may not view the project favorably. For these reasons, some sophisticated suppliers will request that the OEM’s procurement department be involved early in the process.

Sharing Information Helps

Contrary to popular belief, disclosing information during the negotiation process doesn’t weaken either side. OEMs that share the right information with suppliers early in the discussion will earn their respect and trust and better understand the other side’s position. It is especially important for OEMs to be candid with bad news, such as having to dramatically reduce the size of an order. Hiding key information forces the supplier to guess, which could lead to erroneous assumptions, arguments, distrust, and other conflicts. Withholding information can lengthen the negotiation process, running counter to what every OEM’s goal should be—completing deals as soon as possible.

OEMs should first determine what information should be disclosed to the supplier. With regard to sensitive informa-tion that could weaken the OEM’s position, plausible answers or explanations should be prepared that are sufficiently vague, so as not to arouse the supplier’s suspicion or reveal anything proprietary.

OEMs should be prepared to disclose any nonsensitive information that may help them achieve their goals. Informa-tion that may lower, minimize, or change the other party’s expectations gives the OEM power and should be revealed early on, even if it’s not requested. The supplier may be reluctant to share; OEMs should be prepared to trade infor-mation if necessary.

OEMs will need to know what questions to ask to move the negotiation forward. To do this effectively, they should consider information from the other party’s vantage point. This will enable OEMs to develop open-ended questions that will elicit answers beyond the standard yes-no responses and secure the needed information.

Depending on the OEM’s situation and its relationship with the supplier, the OEM may want to send the supplier a list of prioritized variables (such as price, service, and deadlines) before the negotiations begin. It could help the seller better understand the OEM and may lead to shorter negotiations with a better outcome. For example, if price is a low priority for an OEM, the supplier may be willing to accommodate the OEM with regard to its high-priority variables in exchange for a price increase. Although it ends up paying more, the OEM may achieve other goals that it considers far more valuable.
In a competitive bidding process, OEMs should make any request for proposal (RFP) or request for quotation (RFQ) as explicit as possible. Once negotiations are underway, OEMs should express what they want. If the supplier is left to guess, the OEM may wind up trying to pursue a “pin the tail on the donkey” strategy, where it is hesitant to ask for something and merely hopes the seller offers more than requested. If the supplier is given the chance to make the first proposal, it will likely favor the supplier disproportionately.

The Balance of Power: Wish and Concession Lists

A critical part of negotiating is the power balance analysis, which should be a robust and creative process. The OEM’s representatives should start by comparing the OEM’s strengths and weaknesses with the supplier’s and listing what each side will likely want.

The OEM’s wish list should include items that would be nice to have but which are not the primary points being nego-tiated. The OEM should also create a flexible concession list that includes items such as deadlines for low-priority products, payment terms, and length-of-service contracts.

This process will enable the OEM’s representatives to develop their objectives, opening statement, and strategy. It also enables more flexibility between the OEM and the supplier with regard to negotiating terms and fees. For example, if maintaining the upfront asking price of an injection-molding system is more important to the seller than the cost of service, the purchasing OEM may be able to negotiate a highly favorable service contract—thus raising its overall standing in the total cost of analysis.

"Packaging a proposal, by adjusting variables to make the deal more palatable to a supplier, is one way to increase the chances of closing a deal without substantially increasing the price."

Follow Negotiating Best Practices

Negotiation is a multiphase process requiring a strategic approach. To get the most out of negotiations, there are some basic tips for OEMs to follow.

Watch for Signals. Be alert for both verbal and nonverbal signals. Nonverbal signals, such as gestures and changes in posture, may reveal a negotiating partner’s true feelings. Verbal signals are typically words such as like, want, or need. If a supplier says, “I would like a 10% price increase,” it may be settle for less than that figure. Also, since 10% is an estimate, the actual number may be lower.

Signals can also take the form of questions about a stated position. For example, if the supplier’s representative asks a question about a proposal put forth by the OEM, the supplier is likely interested in it. Such signals convey flexibility and should be rewarded, not punished. They indicate flexibility because the party hearing them—the OEM—recognizes that the supplier is not yet at its limit. So the OEM should use these signals to move the process forward. For example, the OEM can say, “Thank you for saying you would ‘like’ a price increase of 5%. Would you settle for 4.5%?”

Know When to Make a Proposal. The proposal sets the agenda for the negotiation. OEMs should be sure they address the key issues, is supported by facts, and doesn’t go beyond what is believed to be the supplier’s limit, which they should have determined in preparation.  The proposal should be preceded by a brief introduction and followed with an explanation and summary. Negotiators can then invite a response by posing the following questions to the supplier:

  • Is the proposal acceptable to you?

  • Which aspect of the proposal are you unhappy with?

  • What can I do to make this proposal acceptable?

  • Under what circumstances would you accept the proposal?

  • If this proposal isn’t acceptable, then what do you propose?

Package the Proposal. Packaging a proposal, by adjusting variables to make the deal more palatable to a supplier, is one way to increase the chances of closing a deal without substantially increasing the price. If the proposal is rejected because the supplier feels it fails to meet its needs, the package can be modified. If they say the proposal isn’t enough, it’s a bargaining issue, indicating that the value—not the shape—of the package needs to be modified.

Bargain Throughout the Negotiation Process. Bargaining is the trading activity that occurs throughout the negotiation process. Negotiators bargain for information, concessions, signals, time, and, ultimately, the final terms of the deal. OEMs should attach conditions to offers. Instead of asking questions when requesting a concession or making an offer, representatives should make statements such as, “If you agree to cut prices 15%, we’ll sign an extended two-year contract.”

OEMs should be prepared to make concessions. A price should always be assigned to demands (even unreasonable demands; these should simply be assigned unreasonable prices), and nothing should be given away without some-thing being offered in return.

Close Effectively. Subtly hinting that it is time to close can draw out any undiscovered issues. For example, a negotia-tor could ask the other party if it would be satisfied if the negotiator agreed to all its conditions.

The most common opportunity to close is when the other party asks a question about a minor aspect of a proposal, such as whether delivery is included or whether legal costs are covered. Instead of replying with a simple yes or no, a negotiator could answer in a way that transitions into an attempt to close. For example, the negotiator could say something like, “If you agree to our proposal, we’ll refer three other companies likely to be interested in your product.”
Closing conditions should be specific and small. When closing, negotiators must avoid getting greedy and snatching defeat from the jaws of victory.

Clarify All Agreements. It’s much easier to clear up ambiguities during negotiations than after. OEMs should confirm agreements in an acceptable form and ensure that all parties are comfortable with and ready to implement them. OEMs should avoid the phenomenon known as “deal creep,” in which the other party’s notes are ambiguous and the OEM interprets them for its benefit.

Conclusion

With the economy continuing to represent a huge unknown, it is important for OEMs to thoroughly understand the value of their products, systems, or contracts—from their perspective as well as that of their suppliers. Having such an understanding puts a company in a good position to maximize results after negotiations are completed. It will also make it easier for individual representatives to defend their decisions within the firm. A representative who, for ex-ample, knows that securing a significant discount on a service contract from a supplier will more than compensate for a 10% price increase can confidently explain this to any colleagues who question the decision to pay more in the short term. The best outcome of a negotiation is for both sides to walk away feeling victorious.

Tom Governale is vice president of business development and strategy at Scotwork (NA) Inc. (Parsippany, NJ).

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