D4 Exam Questions Flashcards
Explain the nature and operation of a ‘call- off contact’ (10)
January 2014, July 2016, May 2018
(LO1)
Explain the nature and operation of a ‘call- off contact’ (10)
A call-off contract is set up for a specific period of time (often 12 months). There is usually (although not always) a commitment by the purchaser to purchase a stated quantity of the item or service that is the subject of the contract during the agreed time period. For example, an agreement might be for 1000 items to be called off as and when required over a 12 month period. Quantities will then be ‘called off’ by the buyer at intervals (not always ‘regular’ intervals). There is usually a binding commitment by the buyer to take the total stated quantity over the contract’s lifespan. The above type of arrangement is sometimes called a ‘blanket order’.
Suggest how the ‘battle of the forms’ may be avoided (15)
January 2014, July 2016, May 2018
(LO1)
Suggest how the ‘battle of the forms’ may be avoided (15)
The best way to avoid the ‘battle of the forms’ is to negotiate with the supplier to agree a contract with terms that both parties can accept and work with. This might be time consuming and expensive but usually settles the contract situation from the start. There are also other ways of avoiding the ‘battle’ most of which involve ensuring that a legally-binding contract is agreed before the supply process starts:
- Buyer to send acknowledgement copies of all enquiries, acommpanied by the buyer’s terms, which potential suppliers must complete and return, indicating agreement. If suppliers instead send in a quotation stating their own terms, the quote must be rejected and the supplier asked to sign the agreement to the buyer’s terms
- Buyer to send acknowledgement copies of all PO’s, which the supplier should sign and return indicating agreement with the buyer’s terms. If the seller acknowledges using its own documentation (an accompanying T & C’s) the buyer should write back stating that delivery will be under the buyer’s conditions
- Negotiate contracts with suppliers, agreeing specific terms and conditions - which may include some of the buyer’s standard terms and some of the seller’s. This is likely a time consuming process only practicable for large volume or value of business
- Check any revised terms or conditions (counter offers) which may be attached to supplier documentation: acknowledgement of orders, delivery notes, invoices, etc
- Stamp delivery notes ‘good received on buyer’s terms and conditions’ on receipt of goods.
Discuss THREE merits of performance specifications in commercial agreements (15)
May 2014, July 2013, Nov 2015, Nov 2017
(LO1)
Discuss THREE merits of performance specifications in commercial agreements (15)
- It can be much quicker to write a performance specification; and a performance specification is likely to be a very much shorter document than a conformance specification, making it much easier and cheaper for all interested parties to handle, amend, read and understand it.
- A performance specification places all risks of non-achievement of performance squarely with the supplier. If the required performance is not met, then the supplier must remedy the situation, wholly at their time and cost.
- A performance specification allows for innovation and new approaches to achieving desired/required performance and to dealing with any problems that arise. This encourages flexibility and innovation in the marketplace.
- The efficacy of the specification does not depend on the technical knowledge of the buyer (unlike conformance specifications). The supplier may know best what is required and how it should be manufactured.
- The potential supply base is wider than might be the case with a conformance specification. The expertise of different suppliers might provide a wide range of solutions as to how a particular function should be performed.
Describe TWO circumstances in which it may be appropriate to use conformance specification in a commercial agreement (10)
May 2014, July 2013, Nov 2015, Nov 2017
(LO1)
Describe TWO circumstances in which it may be appropriate to use conformance specification in a commercial agreement (10)
- Where technical dimensions and weights are absolutely critical, perhaps in terms of sports and racing equipment where exact match to a predetermined technical set of specifications and exact compatibility are essential.
- Another situation could be in medical/pharmaceutical industry areas, where type approval is only given to specific formulations, and the ‘recipe’ must be followed precisely.
- A similar situation may arise where foodstuffs are required to match recipes.
- Another might be in military applications, where conformance to battlefield configuration is all-important.
- Conformance specifications are also useful for spare parts for existing plant and equipment
Explain the main legal differences between an ‘offer’ and a ‘invitation to treat’ (10)
July 2014, Jan 2017
(LO1)
Explain the main legal differences between an ‘offer’ and a ‘invitation to treat’ (10)
An offer is the final willingness of the party to create legal relations. An invitation to offer is not the final willingness but the interest of the party to invite public to offer him. The Offer becomes an agreement when accepted by the other party and is legally binding
An Invitation to offer, becomes an offer when responded by the party to whom it is made.
The main objective of making an offer is to enter into the contract, whereas the main objective of an invitation to offer is to negotiate the terms on which the contract can be made.
Examples of offers: quotations from sellers
Examples of invitations: to treat such as display of goods, advertisements or catalogues from a seller or, from a buyer, a request for quotation
Define the term ‘Framework agreement’ and outline the circumstances in which it may be appropriate to use a framework agreement with a supplier. (15)
July 2014, Jan 2017
(LO1)
Define the term ‘Framework agreement’ and outline the circumstances in which it may be appropriate to use a framework agreement with a supplier. (15)
A framework agreement is a general phrase for agreements with providers that set out terms and conditions under which agreements for specific purchases (known as call-off contracts) can be made throughout the term of the agreement. In most cases a framework agreement will not itself commit either party to purchase or supply, but the procurement to establish a framework agreement is subject to the EU procurement rules. It can be concluded with a single provider or multiple providers. If multiple providers are selected under the framework there must be at least 3 participants.
- The circumstances within which an organisation knows that a requirement will exist in the future but the exact details in terms of quantity, delivery and even specification may not have yet been established.
- The circumstances where goods are required on a regular basis with similar specifications.
- Where an organisation wishes to reduce the time from receipt of requirement to delivery as the contracting process for the final call-off is all that will be required. This can allow users to ‘calloff’ their requirement under the terms of the agreement which would allow the procurement function to pay attention to activities with more value to their organisation than merely calling-off an agreed requirement.
Identify FIVE details of the buyer’s requirement that might be included in a standard enquiry (request for quotation) form (5)
November 2014, January 2018
(LO1)
Identify FIVE details of the buyer’s requirement that might be included in a standard enquiry (request for quotation) form (5)
- The purchaser’s contact details (telephone, e-mail address, etc.)
- A reference number that the potential supplier should use when responding
- The date by which a response to the enquiry (quotation) should be provided
- The quantity of the goods that will be required
- A description of the goods required
- The required place(s) of delivery
- The required date(s) of delivery
- The buyer’s standard legal contract terms
- Any ‘special’ contract terms that might be relevant to the potential contract
- -The buying organisation’s terms of payment.
A best-practice procedure would include a number of steps for the preparation of the invitation to tender.
Outline FIVE steps that should be included in a best-practice tender procedure. (10)
November 2014, January 2018
(LO1)
Outline FIVE steps that should be included in a best-practice tender procedure. (10)
- Preparation of detailed specifications and draft contract documents. The purpose of these is that potential bidders can present a realistic quotation that includes all important features
- Advertisement of the requirement: this should include tender procedures that should be followed and the required tender process timetable
- Sending out pre-qualification questionnaires, in response to expressions of interest from potential suppliers if it is a selective tendering process. Timescales for response should also be included
- Issuing of invitation to tender (ITT) and tender documents to those potential suppliers responding to the ITT within the prescribed time frame
- Arrangement for receipt of tenders (as sealed bids), for opening by the tender evaluation team after the submission closing date
- Analysis and comparison of each tender with a view to selecting the ‘best offer’
- Arrangements for post-tender clarification, verification of supplier information and/or negotiation where required
- Criteria for contract award to the supplier providing the ‘best’ quotation. This part of the process might include de-briefing unsuccessful tenderers
Explain the purposes of a documented specification within a commercial agreement (10)
November 2014, January 2018
(LO1)
Explain the purposes of a documented specification within a commercial agreement (10)
- Defining the requirement in a way that encourages all stakeholders, including users, to consider what they really need and whether this is the best solution.
- Communicating the requirement clearly to suppliers so that they can plan to conform and perhaps use their expertise to develop innovative or lower-cost solutions to the requirement.
- Minimising the risk and cost associated with any doubt, ambiguity, misunderstanding or dispute as to the nature of the requirement and what constitutes satisfactory quality and fitness for purpose.
- They provide a means of evaluating the quality or conformance of the goods or services supplied so that they can be accepted if they conform to the specification or be rejected if they do not conform.
- They can support standardisation and consistency where goods or services are provided by more than one source of supply.
Outline THREE risks associated with oral contracts between purchasers and suppliers (15)
March 2015
(LO1)
Outline THREE risks associated with oral contracts between purchasers and suppliers (15)
- Commitment to inappropriate or disadvantageous terms, owing to the inability to check and confirm a draft agreement in detail (and to have them reviewed by key stakeholders and legal and other experts where necessary)
- Subsequent misunderstanding and contractual disputes, arising from faulty or divergent recollections or interpretations of agreed terms
- Lack of written terms against which compliance and performance can be measured, for contract management
Explain the term ‘misrepresentation’ in contracts and give TWO examples of possible misrepresentation (10)
March 2015
(LO1)
Explain the term ‘misrepresentation’ in contracts and give TWO examples of possible misrepresentation (10)
Misrepresentation may be defined as a false statement of material fact made by one of the contracting parties, before or at the time of entering into the contract, which was intended to (and did) induce the other party to make the contract ie one party relies on a statement made by the other party - perhaps in negotiations - and the statement turns out to be false or misleading.
Examples:
- When purchasing a valve from a supplier we specifically stated that the material must be able to handle a specific pressure under certain conditions and it didnt - event though the data ahseet they supplied for the valve stated it could. When receiving the value in our stores, it couldnt be determined that it would work the way we wanted to only when we installed it it didnt work as promised. A replacement valve was ordered and tested by a third party and was found that it didnt comply with their own spec sheets. They sold us a product that was inadequate for our purpose by mirepresenting their specs
- A supplier stated that they were qualified under ISO standard 17025 to calibrate our equipment but during an audit we found that they misrepresented themselves to get the contract.
Explain FIVE requirements for ensuring the creation of a legally binding contract (25)
May 2015, November 2013, Mar 2017
(LO1)
Explain FIVE requirements for ensuring the creation of a legally binding contract (25)
- Agreement
- A party should not be held to a contract which they were not aware existed or did not intend to exist, or thought was about something other than turned out to be the case
- It is only when all parties involved are aware of a legal obligation, and the nature of that obligation, that there is a ‘meeting of the minds’
- Offer and Acceptance
- One party (the offeror) must make a definite promise to be legally bound on specific terms (this is the offer). The other party (the offeree) must accept the offer, clearly, unconditionally and freely (ie not subject to duress or undue influence)
- The offer can be made expressly or by implication, where a person’s behaviour implies the offer
- Once an offer is made the offeree must accept the offer, clearly, unconditionally and freely - this is acceptance
- Any form of acceptance is valid ie oral, written, inferred from the conduct of the parties, unless the offeror stipulates otherwise ie by stating the acceptance must be in writing or within a certain time frame
- Silence alone is not acceptance
- It is the responsibility of the offeree to ensure that the acceptance is properly and clearly communicated to the offeror
- The agreement will only be complete when the offeror has received and understood the acceptance
- Acceptance is an unconditional assent (‘yes’) to all terms of an offer. If an offeror attempts to change the terms of the offer, to use its own stanard terms of business or to stipulate conditions, this is taken as a rejection of the original offer and the presentation of a counter-offer - which must then be accepted by the pther party.
- Consideration
- A contract must be an exchange, one person gives something up because the other does, as part of a transaction
- Consideration must be valuable (it must have monetary value) but does not have to be adequate
- Consideration must be sufficient ie it must be recognised by the law
- Past consideration (eg money already spent on the project) which is not directly related to the present activity (for which consideration is being exchanged) is not a valid consideration
- Where a person is already obliged to do something by law, or as an existing contractual duty, the discharge of that duty will not amount to consideration - though if you go above and beyond your legal duty, this would be sufficient consideration to warrant getting a benefit in return
- Intention to create legal relations
- This means that both parties must intend that the agreement between them is intended to be legally binding ie each party acknowledges that if a dispute arises the matter can be taken to court to decide the matter
- Contractual capacity
- In order for the contract to be valid the parties must have legal capacity (or ability) to enter into a contract. Most individuals have this automatically on their own behalf - with the exception of minors (under 18), the mentally disordered and those under the influence of drugs or alcohol.
- A corporation is a recognised legal ‘person’ or ‘entity’ and can therefore make contracts in its own name
- The only people with ‘absolute capacity’ are the owner (eg in a sole trade), partners or directors, or agent with formally delegated powers to act on the company’s behalf
- With regards to employees in a company, contracts should only be entered into by individuals who have clear delegated authority to do so on the organisation’s behalf. An employee’s ‘apparent authority’ may be greater than his ‘actual authority’. If an agent acts in excess of his actual authority, the principal will still be bound if he has acted within his apparent authority.
Outline FIVE potential benefits of using Key Performance Indicators (KPIs) as performance measures. (10)
July 2015, Mar 2018
(LO1)
Outline FIVE potential benefits of using Key Performance Indicators (KPIs) as performance measures. (10)
- They can provide motivation to achieve or surpass a specified performance level, particularly if they are linked to incentives, rewards or penalties
- They can provide support for collaborative buyer/supplier relationships by enabling integrated or two-way performance measurement
- They provide the ability to compare year-on-year performance which can allow the identification of improvement or deterioration trends
- They can allow focus on key areas of results: examples of which might include cost reduction and quality improvement
- They assist the clear definition of shared goals which can facilitate cross-functional and cross-organisational teamwork and relationships
- They should lead to reduced conflict arising from such causes as confusion of goals/objectives and unclear expectations
- They can set clear performance criteria and expectations to motivate compliance and improvement
- They can assist the managing of supply risk by controlling quality, delivery, value for money, etc.
- They can support contract management to ensure that agreed benefits are obtained
- They can provide feedback for learning and continuous improvement in the buyer/supplier relationship, both for the supplier and the purchasing department.
Contract schedules provide additional or more detailed information than is provided in the main contract terms and can be referred to separately for detail on particular supplementary areas. Explain the typical content and use of the following contract schedules:
- Health and safety requirements
- Non-disclosure agreements
- Use of subcontractors. (15)
July 2015, Mar 2018
(LO1)
Contract schedules provide additional or more detailed information than is provided in the main contract terms and can be referred to separately for detail on particular supplementary areas. Explain the typical content and use of the following contract schedules: (15)
1. Health and safety requirements:
- A schedule may be used to highlight all parties’ statutory duties in regard to workplace health and safety (e.g. under the 1974 HASAWA in the UK). The schedule may also be used to state agreed terms in relation to: the health and safety policies with which both parties are to comply; arrangements for the monitoring of health and safety standards and staff training; health and safety records and reporting; the reporting of critical incidents, all relevant standards, law and regulation which apply to the agreement.
2. Non-disclosure agreements:
- These are used where strict confidentiality is required because commercially sensitive information may be exchanged in negotiation and/or performance of the contract. A separate non-disclosure agreement might be included in the contract as a schedule. This should define ‘confidential information’ (i.e. information that is specifically applicable to the contract) and stipulate that the other party will take all necessary steps to keep such information confidential and apportion liability for damages in the event of breach.
3. Use of subcontractors:
- A subcontracting and assignment clause in the main contract might be used to prevent any assignment or subcontracting of work or service provision by the supplier to a third party without written consent by the buyer. A separate schedule may set out the details of such an agreement such as: circumstances in which the supplier may and may not be permitted to subcontract; notification and notice periods for buyer approval of nominated subcontractors; policies and standards to which any subcontractor must comply and specimen forms for subcontractor prequalification or rating.
Explain FIVE details that a typical ‘Enquiry’ or ‘Request for Quotation’ (RFQ) form will include. (15)
January 2016, Jul 2017
(LO1)
Explain FIVE details that a typical ‘Enquiry’ or ‘Request for Quotation’ (RFQ) form will include. (15)
- The contact details of the purchaser
- A reference number to use in reply, and date by which to reply
- The quantity and description of goods or services required
- The required place and date of delivery
- The buyer’s standard (and any special) terms and conditions of purchase
- Terms of payment
Describe TWO circumstances in which it may be appropriate for a procurement function to use a performance specification to specify requirements in a commercial agreement. (10)
January 2016, Jul 2017
(LO1)
Describe TWO circumstances in which it may be appropriate for a procurement function to use a performance specification to specify requirements in a commercial agreement. (10)
- Suppliers have greater relevant technical and manufacturing expertise than the buyer - so that the best knowledge is being used and leveraged. it should also be noted that the buyer will be highly reliant on the supplier’s expertise: this puts pressure on effective supplier selection and evaluation
- Technology is changing rapidly in the supplying industry so that the buyer is not in a position of specifying yesterday’s methodologies, but gets the best out of a supplier’s innovation capacity and technological development
Discuss TWO key performance indicators that could be used in a contract with a supplier. Illustrate your answer with relevant examples. (10)
March 2016, March 2014, January 2015
(LO1)
Discuss TWO key performance indicators that could be used in a contract with a supplier. Illustrate your answer with relevant examples. (10)
- Cost Management
- Value or percentage of cost reductions obtained
- Number of cost reduction initiatives proposed or implemented
- Percentage range of acceptable cost variance from budgeted costs
- Timeliness/delivery
- Frequency or percentage of late, incorrect or incomplete deliveries
- Percentage of on time, in full - OTIF - deliveries
- Range of acceptable schedule variances (deadline +/-x hours /days)
Explain THREE reasons why it may be more difficult to develop specifications in contracts for services rather than in contracts for goods. (15)
March 2016, March 2014, January 2015
(LO1)
Explain THREE reasons why it may be more difficult to develop specifications in contracts for services rather than in contracts for goods. (15)
- Services are intangible and lack “inspectability”:
- Specifying service levels - and subsequently checking whether or how far they have been achieved - is therefore frought with difficulty ie how clean is clean? How long should it take to repair a computer?
- Services are variable:
- every separate instance of service provision is unique because the personnel and circumstance are different, it is hard to standardise requirements
- Services are provided in ‘real time’:
- transport, accommodation and catering services, for example are only relevant when they are needed. Specification therefore needs to include the time of provision so that the supplier can schedule provision accordingly
- Many services can only be provided in specific locations
- eg accommodation provided at hotel premises, cleaning provided at the buyer’s offices
- Specifications may need to include explicit understandings, where the service is to be provided, the access required and related issues i.e. confidentiality, if suppliers are working on the buyer’s premises
- A service may be procured for a long contract period, during which requirements may change from the original specification requiring review, flexibility and change controls
Explain THREE requirements that an offer must fulfil in order to be legally valid. (15)
May 2016
(LO1)
Explain THREE requirements that an offer must fulfil in order to be legally valid. (15)
- An offer must be a definite, unequivocal or unambiguous statement of willingness to be bound in contract. This means that an offer is not a ‘general’ picture of what a seller may be willing to sell (e.g. a catalogue or goods placed on the shelves of a shop). Nor should it be (e.g.) a request for quotation from a buyer. It should be remembered that an offer can be an offer to buy or an offer to sell.
- The person/organisation making the offer (offeror) must intend to be bound by it. A legally valid offer is one which the person/organisation receiving the offer (offeree) only has to accept, on the basis of terms laid down by the offeror, in order to complete a legally binding contract. If proposed terms are likely to change as a result of (e.g.) negotiation, each new set of terms is a separate offer.
- An offer must be communicated successfully to the offeree. This might appear to be obvious but in cases where offers are communicated (e.g.) by post, e-mail or telephone, it is possible that the offeree might not be aware that an offer is being made. Equally, if the offeree has limited knowledge of contract law, they may not be aware that a legally valid offer is being made in any circumstances.
- The offer must be open (still in force) when the offeree accepts it. Once an offer has been ‘closed’ (e.g. by an end date stated in the offer) or revoked by the offeror, it can no longer be accepted.
- The party making the offer must have the capacity to do so e.g. not a minor (below the age of 18 years in UK law), of unsound mind or intoxicated by alcohol or drugs. In an organisation, the person receiving the offer should be given capacity to do so by senior management.
Explain what is meant by ‘battle of the forms’ in relation to the precedence of the buyer’s contract terms or the supplier’s contract terms. (10)
May 2016
(LO1)
Explain what is meant by ‘battle of the forms’ in relation to the precedence of the buyer’s contract terms or the supplier’s contract terms. (10)
The ‘battle of the forms’ is a situation where no acceptance to an original offer has taken place, usually because what the offeree intended to be acceptance, was actually a counter-offer due to differences occurring between the offer and the intended acceptance.
Such differences would usually occur because of a difference in contract terms. The term ‘battle of the forms’ derives from the fact that a stream of documents (forms) may pass between buyer and seller with each one containing the sender’s contract terms meaning that the document would be a counter-offer when related to the previous form. Actual documents (forms) involved in the ‘battle’ could be a purchase order that differs from a quotation or an order acknowledgement that differs in some way from the purchase order.
Once the goods have been delivered (because any differences contained in the various documents preceding delivery may not have been identified) and accepted by the buyer, a legally binding contract is deemed to exist with the binding terms being contained in the last document that passed between the parties. This situation is often referred to as ‘firing the last shot’.
An example of this might be the buyer signing the supplier’s delivery note without inspecting the supplier’s contract terms. This would mean that the buyer has accepted the supplier’s contract terms.
Explain TWO advantages and TWO disadvantages for a procurement organisation of leasing an asset (such as a piece of equipment), rather than buying it outright. (16)
Nov 2016
(LO1)
Explain TWO advantages and TWO disadvantages for a procurement organisation of leasing an asset (such as a piece of equipment), rather than buying it outright. (16)
Advantages
- Typical advantages of leasing are that no initial capital investment is required by the procurement organisation that will tie up its capital.
- The total cost of the lease contract will be known and agreed in advance and the procurement organisation may have the option to secure outright ownership of the asset or to return it to the leasing company at the end of the contract.
- Leasing can protect the procurement organisation from possible technological obsolescence of the asset and it should be easier for the asset to be upgraded or replaced.
Disadvantages
- The procurement organisation will be committed to making regular payments to the leasing company over the period of the lease contract.
- The leasing company will make a charge to finance the leasing contract and make a profit meaning that the total cost for the procurement organisation over the contract period may be greater than for an outright purchase.
- The asset remains in the ownership of the leasing company throughout the contract period this means that the procurement organisation does not have total control of the asset.
Outline THREE elements of a contract for the hire of goods that are not present in a contract for the sale of goods. (9)
Nov 2016
(LO1)
Outline THREE elements of a contract for the hire of goods that are not present in a contract for the sale of goods. (9)
- There is no transfer of ownership from the owner of the goods to the organisation hiring them whereas, in a contract for purchase, the buyer becomes the owner of the goods. The hirer is allowed possession and use of the goods for the period specified in the contract whereas, when the item is purchased, the goods remain the property of the buyer until they choose to sell.
- The hirer is obliged to pay the owner at the hire rate per period of hire, as agreed in the contract, whereas if the item is purchased, then the full purchase price has to be paid.
- The hirer has a duty to take reasonable care of the goods while they are in its possession (e.g. to maintain them properly or use them safely).
Explain FIVE differences between integrative and distributive approaches to negotiation (15)
July 2013, Jan 2015, Jan 2018
(LO2)
Explain FIVE differences between integrative and distributive approaches to negotiation (15)
- There is a range of features between integrative and distributive approaches to negotiation but that the differences must be emphasised not just the characteristics explained of one approach and then the other. There should, therefore, be a comparison of each negotiation feature. The following are typical negotiation characteristics:
- Emphasis - integrative negotiation aims to achieve goals common to both parties, distributive negotiation aims to achieve goals at the expense of the other party
- Strategy formation, in integrative negotiation, is based on openness, trust and information sharing whereas in distributive negotiation there tends tom be secrecy, low level of trust and withholding information
- Desired outcomes – in integrative, desired outcomes are expressed early so all parties understand.
- Distributive outcomes are often misrepresented so the other party is not clear of what they are
- Strategies – integrative strategies are flexible and aimed at reaching an agreement whereas distributive strategies are Inflexible and uses ploys to gain advantage
- Tactics – integrative buyers will refrain from threat tactics preferring a rational solution of issues and a ‘pull’ influencing approach whereas a distributive buyer will use threats, bluffs and ultimatums which reflect a ‘push’ influencing style
- Integrative negotiators take flexible positions, to further the interests of the other party and develop options. Distributive buyers are often inflexible and take a fixed position
- Approach – integrative approach is cooperative, assertive but not aggressive versus hostile and aggressive
- Logical extreme – integrative approach is what is good for either party is good for both parties whereas distributive seeks to block the other party from reaching their goal
- Attitude – integrative negotiation has a ‘win-win’ attitude whereas distributive negotiation has a ‘we win/you lose’ attitude.
- If an integrative negotiation reaches impasse then options such as introducing a mediator/arbitrator is explored whereas in distributive negotiation, the negotiation might be terminated
Discuss TWO reasons why a buyer might develop a BATNA when preparing for a negotiation (10)
July 2013, Jan 2015, Jan 2018
(LO2)
Discuss TWO reasons why a buyer might develop a BATNA when preparing for a negotiation (10)
The BATNA (Best alternative to a negotiated agreement) concept is a plan B which might be required if the buyer has to walk away from a negotiation because agreement cannot be reached.
- BATNA may be used as ‘leverage’ and would allow more assertive negotiation especially if the other party wishes to conclude quickly
- BATNA prevents the need to accept terms which may be below a minimum acceptable position for the buyer
- It gives the buyer a decision rule of when to refuse a ‘take it or leave it’ situation offered by the other party. It provides a benchmark to avoid accepting a deal with unfeasible concessions which would damage the feasibility of the deal and the on-going relationship
- It avoids a win-lose outcome and the risk of reaching an impasse
Explain the term ‘balance of power’ in commercial negotiations (5)
November 2013, January 2014
(LO2)
Explain the term ‘balance of power’ in commercial negotiations (5)
One of the main reasons for entering into a negotiation is to achieve better results than would be possible without negotiating. The stronger the BATNA, the greater the range of alternative courses of action and the greater the ability to walk away from an unsatisfactory negotiation. Paradoxically, one of the greatest dangers in a negotiation is being too committed to reaching agreement without sufficient consideration of one’s BATNA! If you are unaware of your BATNA, you are in danger of entering into an agreement that you would be better off without. Other uses of the BATNA will be explored later in this Guide.
The balance of power will sit with the Purchaser, because of large buying power
The balance of power will sit with the supplier if he has an actual monopoly, a geographical monopoly or a virtual monopoly position in the market.
Any market power must not be misused to damage, eliminate or exclude competitors from the market.
Purchasers can increase their negotiating power by identifying a number of alternative products/services and by having a range of possible suppliers
Buyers should never enter a negotiation without knowing the alternatives that are open to them.
Discuss how the balance of power may affect commercial negotiations (10)
November 2013, January 2014
(LO2)
Discuss how the balance of power may affect commercial negotiations (10)
Five different sources of power organisational relationships were identified by French and Raven
- Legitimate Power legal/rational - ability exert influence is based on others’ belief in the legitimacy of the authority
- Expert Power - expertise/knowledge is recognised and valued by others - so willing to be influenced by experts
- Reward power - recognised control over resources and recognised by others as having value - so they are willing to be influenced in return for rewards
- Referent Power - emenating from the attractive/inspiring personality ie interpersonal skills, communication and influencing skills.
- Coercive Power - power to threaten sanction, hand out punishments or intimidate others if compliance is not obtained
Explain why negotiators may develop a BATNA when planning for a commercial negotiation (10)
November 2013, January 2014
(LO2)
Explain why negotiators may develop a BATNA when planning for a commercial negotiation (10)
- Having a back up plan (the BATNA - Best alternative to a negotiated agreement) as an acceptable alternative to a negotiated agreement:
- Enables you to be more assertive during negotiation, because you can use the availability of a good BATNA as leverage ( especially if the other party is anxious to conclude a deal)
- Protects you from feeling that you ‘have to’ accept terms that are too unfavourable (below your minimum acceptable position). Once your resistance point/walk-away position is reached, the BATNA offers a better outcome - rather than making further concessions to ‘reach a deal’ (taking the agreement below the outcome available through the BATNA), it will be better to walk away
- Provides decision rule, if negotiations reach a point where the other party is saying: “Take it or leave it” - by identifying exactly what the alternative is if you decide to “leave it”
Discuss FOUR differences between distributive (win-lose) and integrative (win-win) approaches to commercial negotiation (16)
March 2014, May 2016
(LO2)
Discuss FOUR differences between distributive (win-lose) and integrative (win-win) approaches to commercial negotiation (16)
- Key Attitude
- D: We win, you lose
- I: How can the goals of each party be achieved so that both win?
- Approach
- D: Hostile and aggressive - us against them
- I: Positive, assertive but not aggressive, supportive - we are in this together
- Impasse Options
- D: The negotiation may be terminated
- I: Impasse is regard as just another issue to be solved, possibly by internvention of higher management, mediator or arbitrator
- Tactics
- D: Use threats, bluffs and ultimatums to keep other party on defensive
- I: Parties refrain from threats because they are viewed as counter-productive to the rational solution of issues and problem
Suggest THREE situations when a distributive approach may be appropriate for commercial negotiations (9)
March 2014, May 2016
(LO2)
Suggest THREE situations when a distributive approach may be appropriate for commercial negotiations (9)
- A point is non-negotiable ie HSE commitments
- When one party has high bargaining power over the other (and it would represent poor stewardship of the shareholder’s resources not to reap benefit from that advantage)
- When maximising benefit from a transaction is more important than developing the potential in a relationship (usually high volume, routine purchases that can be purchased from any supplier)
Describe THREE sources of personal power that can be used in a commercial negotiation (15)
November 2014, January 2016
(LO2)
Describe THREE sources of personal power that can be used in a commercial negotiation (15)
- Informational
- Resources for rational persuasion based on
- Information: the accumulation and presentation of data intended to change the other person’s point of view or position on an issue
- Expertise: an acknowledged accumulation of infromation, or mastery of a body of information, on a particular problem or issue
- Resources for rational persuasion based on
- Personality and Individual differences
- Power derived from differences in
- Pshycological orientation (greater willingness to use power)
- Cognitive orientation (ideology and understanding of power)
- Motivational oerientation (satisfaction and rewards of using power)
- Dispositions and skills (behavioural tendencies and skills favouring co-operation or competition)
- Moral orientation (ethical values around use of power)
- Power derived from differences in
- Position-based power
- Power derived from a position of formal authority or influence in an organisation or communication structure, leading to
- Legitimate power, or formal authority, derived from occupynig a key position in a hierarchical organisation
- Resource control: control over the deployment of moey, raw material, labour, time and equipment, which can be used as incentives to encourage compliance or as a sanction for non-compliance
- Power derived from a position of formal authority or influence in an organisation or communication structure, leading to
Explain the reasons that lead to a monopoly supplier having high power relative to a purchaser in a commercial negotiation (10)
November 2014, January 2016
(LO2)
Explain the reasons that lead to a monopoly supplier having high power relative to a purchaser in a commercial negotiation (10)
- Only one supplier of the goods exists. It may be a single organisation, or a group of producers acting together to control supply ( eg a cartel such as theOrganisation of Petroleum Exporting Countries , OPEC)
- There are barriers to entry, preventing other firms from entering the market (eg high set up costs, high customer loyalty to the existing producer, or the existing producer monopolising sources of supply and distribution channels)
- There are no substitutes for the goods being produced (which would enable buyers to switch suppliers)
Explain how negotiation could be used during THREE different stages of the sourcing process (15)
March 2015, November 2016, May 2018
(LO2)
Explain how negotiation could be used during THREE different stages of the sourcing process (15)
A typical sourcing process with its stages would be:
- Identify and define needs – at this stage procurement can be involved in challenging requirements and specifications using negotiation to challenge elements of the specification. Procurement might want to achieve the most open requirements to enable negotiation with a range of suppliers and allow options and innovation to be part of a supplier proposal.
- Contract management – Contract performance and relationship management may create problems and conflicts that Procurement should try to resolve through negotiation. Suppliers will have obligations to perform under the contract and if performance levels fall, this should be addressed. Requirements and circumstances may change and might need to be accounted for in the contract. Non-conformance or breaches of contract may also arise and need to be resolved within the terms of the contract.
- Develop contract terms – While procurement may issue standard terms and conditions, it is likely that there will be discussion and negotiation about some terms and other specific commercial requirements for the purchase.
- Negotiate best value – Procurement might choose to negotiate with external organisations to ensure prices are competitive, to ensure the best mix of requirements is achieved if price is not the only distinguishing factor.
- Source the market – RFI/RFP/RFQ - Proposals are requested from a number of suppliers as a basis for negotiation.
- Post tender negotiations – after receiving tender responses but before contract award negotiation may be required for clarification of elements of the submission.
Explain how stakeholders can contribute to a commercial negotiation (10)
March 2015, November 2016, May 2018
(LO2)
Explain how stakeholders can contribute to a commercial negotiation (10)
- Negotiator(s) – directly responsible for the process and outcome.
- Contract Managers – responsible for managing contract performance.
- Implementation personnel – responsible for supply arrangements, payment etc.
- Users of the products and services - specifications and Service Level Agreements (SLA) are important to users.
- Budget holders – interested in the value outcome of the deal.
- Senior management – interested in the risks and effectiveness of any agreement and how it might affect profitability overall.
- The suppliers - interested in gaining the business.
- External bodies - this could include government agencies, local councils etc.
Explain how a purchaser might establish a range of acceptable positions for the negotiation of variables (10)
March 2014, Jul 2017
(LO3)
Explain how a purchaser might establish a range of acceptable positions for the negotiation of variables (10)
Variables are the currencies that will be traded or exchanged in the negotiation bargaining or moving phase
What does your party have to offer that will be valued by the other party? eg the supplier’s ability to offer an nehanced payment terms, or discounts in exchange for higher volume order
What can you offer that will be valuable for the other party to receive (eg a hgh priority in the objective list) while not costing you very much to give?
What does the other party have to offcer you, that you want? What value or priority do you place on this, and what would you be willing to trade in return for it?
Commonly accepted three scenarios to consider:
the best case (like to achieve), the worst case position (must achieve) and a realistic option (Intent to achieve). This is commonly known as MIL.
The purchaser should know its own best and worst outcome for each variable and can estimate the other party’s best and worst positions. The range where these overlap indicates that there is room for negotiation
and the purchaser can prepare for this negotiation. If there is no range of variables, the negotiation will fail unless an alternative concession is found which might change one party’s range of acceptance. For example, a shorter lead-time might encourage a purchaser to consider an increase in price.
e.g. price or delivery - to illustrate the points made.
They might also reference theory sources Bailey et al, Gavin Kennedy etc and might explain BATNA as part of the answer.
The purchaser may collaborate with other stakeholders such as users and senior managers in order to identify important variables and why they might be important
