D4 - Negotiating and Contracting in Procurement & Supply Flashcards Preview

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Flashcards in D4 - Negotiating and Contracting in Procurement & Supply Deck (89)
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Contract terms can be split into two categories, condition or warranty. What is meant by these categories?

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.


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)


Describe Cox et Als power matrix

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)


Describe different types of relationships from the competitive end through to the collaborative end of the spectrum.

1. Adversarial
2. Arms Length
3. Transactional
4. Closer tactical
5. Single-sourced
6. Outsourcing
7. Strategic alliance
8. Partnership
9. Co-destiny


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


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


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)


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)


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


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


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)


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...


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


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


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


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


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)


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


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


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


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


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


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.


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.


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


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


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


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


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)


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