Procurement Management and Global Sourcing

Topic 10 – Negotiation, Ethics and Legal Issues

 Disclaimer

This subject material is issued by RMIT on the understanding that:

1. RMIT, its directors, author(s), or any other persons involved in the preparation of this
publication expressly disclaim all and any contractual, tortious, or other form of liability
to any person (purchaser of this publication or not) in respect of the publication and any
consequences arising from its use, including any omission made, by any person in reliance
upon the whole or any part of the contents of this publication.
2. RMIT expressly disclaims all and any liability to any person in respect of anything and of
the consequences of anything done or omitted to be done by any such person in reliance,
whether whole or partial, upon the whole or any part of the contents of this subject
material.
3. No person should act on the basis of the material contained in the publication without
considering and taking professional advice.
4. No correspondence will be entered into in relation to this publication by the distributors,
publisher, editor(s) or author(s) or any other person on their behalf or otherwise.

All details were accurate at the time of printing.

© RMIT University 2015
February 2015

Topic 10 – Negotiation, Ethics and Legal Issues i

Contents

Contents ii

Introduction 1
Learning objectives 1

Negotiation 2

Procurement Negotiation Process 2

Key Issues 4

Approaches to Negotiation 4

Ethical Issues in Procurement 5

Code of Ethics (Principles of Procurement Practice) 6

Summary 6

ii Procurement Management and Global Sourcing

Introduction
There are a variety of negotiating methods which can be utilised. Some are
more aggressive and adversarial than others ‐ just as people can be, and
often the negotiators’ own styles and personalities will influence the
negotiation process.
Successful negotiations need to produce a “win-win” outcome. Your
company will probably not want to deal with a vendor who will go out of
business soon. You may help to produce that outcome if you do not allow
the vendor to make any profit, or negotiate so strictly that it is not
worthwhile for the vendor to continue doing business with you. You need to
achieve a balance of what is fair and reasonable for both parties, without
either party believing it has taken advantage of the other, or has been the
loser.
The traditional approach to purchasing, used for many years - and still used
in some organisations - could be described as win-lose. The purchaser thinks
he/she wins through cheap price, but the supplier loses because he/she is
not making a profit. The supplier may decide to turn the “lose” into a
“win” for him/her by using inferior material or methods, which then means
the purchaser’s “win” turns into a “lose” because the goods supplied are
not of satisfactory standard. A less adversarial approach to purchasing tends
to be more of a WIN-WIN situation forming the basis for ongoing trust in the
relationship, and a long term partnership approach.
When you are negotiating, a range of confidential matters are likely to be
discussed. That confidentiality needs to be respected by both parties. You
may think that you are being clever by showing one vendor’s price to
another vendor of the same product, but this does not necessarily promote
the atmosphere of trust that helps to build successful relationships (and
could, in some circumstances, leave you open to litigation).
Negotiating methods can also vary between countries, cultures, and the
people involved. Be aware of this and try to adapt to it, but also be aware
that negotiation methods and conditions with which you personally feel
comfortable may be the ones which most influence the success of the
negotiations. Trust is developed through understanding and confidence.

Learning objectives
At the conclusion of this topic you should be able to:
• assess various aspects of the procurement negotiation.
• devise a framework that supports a systematic approach to the
procurement negotiation.
• administer process of negotiation
• examine the ethical issues in procurement

Topic 10 – Negotiation, Ethics and Legal Issues 1

 Reading
Prescribed Text: Monczka, R.M., Handfield, R.B., Giunipero, L.C. and
Patterson, James L. (2014), Purchasing and Supply Chain
Management, South-Western, Cengage Learning. 6th Edition. Chapter
13.

Negotiation
Negotiation can be defined as a process of formal communication, either
face to face or via electronic means, where two or more people come
together to seek mutual agreement about an issue or issues. The process
involves the management of time, information, and power. It is a time-
consuming process that requires extensive planning and a commitment of
resources--90% of the negotiation process involves preparation, not
execution. Negotiation involves relationships between people, not just
organisations. The primary objective of a purchase negotiation is to reach
an agreement that satisfies both parties. Negotiation is an opportunity to
create value within the supply chain. Good negotiators are not born--they
develop their skills through practice.

Procurement Negotiation Process

The negotiation process in procurement involves five steps. These are listed
below and described thereafter.
1. Identify or Anticipate a Purchase Requirement
2. Plan for the Negotiation
3. Identify the Zone of Negotiation
4. Conduct the Negotiation
5. Execute the Agreement
Step 1. Identify or Anticipate a Purchase Requirement
• The purchasing cycle begins with identifying a material need or
requirement for a component, raw material, sub-assembly, service,
supplies, piece of equipment, or completely finished product
• Not all purchase requirements require detailed negotiations with suppliers.
Remember--negotiation is a time consuming process!
• Once the need is determined, the buyer or purchaser must understand the
organisational cost structure.
• The purchasing cycle begins with identifying a material need or
requirement for a component, raw material, sub-assembly, service,
supplies, piece of equipment, or completely finished product
• Not all purchase requirements require detailed negotiations with suppliers.

2 Procurement Management and Global Sourcing

 Remember--negotiation is a time consuming process!
• Once the need is determined, the buyer or purchaser must understand the
organisational cost structure.
• The purchasing cycle begins with identifying a material need or
requirement for a component, raw material, sub-assembly, service,
supplies, piece of equipment, or completely finished product
• Not all purchase requirements require detailed negotiations with suppliers.
Remember--negotiation is a time consuming process!
• Once the need is determined, the buyer or purchaser must understand the
organisational cost structure.
Step 2: Plan for the Negotiation
• Preparation and planning are considered the most important part of
negotiation
• A plan is a method or scheme for achieving a desired end. Planning,
therefore, is the process of devising methods to achieve a desired end
• Common planning weaknesses
• Failing to commit sufficient time
• Failing to establish clear objectives
• Failing to formulate convincing arguments or support for positions
• Failing to consider a counterpart’s needs
• Believing quick and clever is enough
• The negotiation planning process involves many activities—
 Determine who will participate.
 Identify specific objectives
 Analyze strengths and weaknesses of each party
 Gather information
 Recognize counterparts’ needs.
 The negotiation planning process also involves many activities—
 Identify facts and issues.
 Establish a position on each issue.
 Develop appropriate strategies and tactics.
 Brief other personnel.
 Practice the negotiation.
 Establishing a position on price and range on Key Issues
If negotiators do not develop ranges for key issues, the likelihood of overlap
decreases and it is in the area of these overlaps that agreements are
reached.
Step 3: Identify the Zone of Negotiation - Price
Try to identify overlapping zones of negotiation. For example, if your
expected price is between $100 and $115, and the suppliers expected price
$110 to $125, there is a possibility that negotiation process will be fruitful.
However, if your expectation is well below that the supplier expects, the
negotiation process may not be successful.

Topic 10 – Negotiation, Ethics and Legal Issues 3

 Step 4: Conduct the Negotiation
• Deciding where to negotiate can be an important issue
• The atmosphere surrounding the negotiation should be less formal
wherever possible
• Summarize positions and points of agreement throughout the negotiation
• Debrief after the negotiation session--identify lessons learned from the
experience
• Research reveals that effective negotiators display certain behaviours—
• Willing to compromise or revise their goals, particularly when new
information successfully challenges their position
• View issues independently
• Establish lower and upper ranges for each major issue
• Explore almost twice as many options per issue compared with average
negotiators
• Make almost four times the comments about the common ground
between parties
• Give fewer reasons for the arguments they advance (too many
supporting reasons can dilute an argument)
• Make fewer counterproposals
Step 5: Execute the Agreement
• A negotiated agreement represents the beginning rather than the end of
the process
• A key part of executing a negotiated agreement between parties involve
providing performance feedback
• Build on the success of the agreement

Key Issues
• Quality (Specification compliance, performance compliance, rejection
procedures, design changes, packaging).
• Supports (Technical assistance, training, data sharing, product research,
warranty).
• Delivery and transportation (Delivery schedule, expansion options, carrier,
commodity classification).

Approaches to Negotiation
There are two approaches in negation. Adversarial and collaborative.
Adversarial approach is when negotiators apply “we win-you lose attitude”.
This approach is based on secretive, retention of information and low level
of trust between parties. Collaborative approach on the other hand, is

4 Procurement Management and Global Sourcing

 based on openness, sharing of information, the desired outcome is made
known, no hidden agenda and high level of trust.
Negotiation is in buyers favour if demand is not urgent, suppliers are
anxious to get the business, many suppliers, buyer is monopolistic,
alternatives materials and buyer is strong in financial and prompt payment.
However, the situation may suppler if demand is urgent, supplier does not
keen on the business, supplier is monopolistic, supplier has good reputation
and supplier has the technology or proprietary knowledge.
A concession (is a movement away from a position by offering something of
value to the other party) may make the negotiating process work. All
parties must be willing to demonstrate flexibility. Without a willingness to
concede to some degree to find alternative solutions, parties to a
negotiation will often find themselves in deadlock. The manner in which a
negotiator approaches concessions is an important part of the negotiating
strategy.

Ethical Issues in Procurement

Ethics comes from a Greek word – ETHIKA which means character or custom
and relates to the principles of standards of human conduct. Ethics can be
defined as a set of moral principles or values guiding our behaviour in an
organisation. Three rules of ethics buyers must follow:
• A buyer must be loyal to the organisation
• Must act ethically towards suppliers
• Must uphold ethical standards of the profession
There are significant risks of unethical behaviour. Some of these are
described below:
• Legal risk – Legal penalties could ensue as a result of unethical behaviour.
• Personal risk - Buyer’s professional reputation could be at risk.
• Company risk – Company’s reputation could be at risk.
There are several types s of unethical behaviour. Some examples are given
below:
• Reciprocity (Giving preferential treatment to suppliers who are also
customers, can take on a coercive nature)
• Personal buying
• Accepting supplier favours
• Financial conflicts of interest,
Other Unethical Practices includes wilful use of information, exaggerating
problems, requesting bids from unqualified suppliers, gaining information
unfairly, sharing information on competitive bids, not compensating for
design work, taking unfair advantage of financial situation and lying or
misleading.

Topic 10 – Negotiation, Ethics and Legal Issues 5

Code of Ethics (Principles of Procurement Practice)
An ethical procurement personnel will be fully loyal to his/her organisation,
treat fairly with whom s/he deals, faith in his/her profession, consider the
interest of company in all transactions, be open to advice when
appropriate, work towards the maximum value for each dollar of
expenditure, strive to be knowledgeable of the materials and processes of
manufacturing within his/her realm responsibilities. The ethical personnel
also will subscribe to and work for honesty and truth in buying and selling,
offer a prompt and courteous reception to all who call on a legitimate
business mission, Respect his/her obligations, help fellow procurement
managers in performing their duties and cooperate with all efforts to
enhance the development and standing of purchasing. More difficult issues,
particularly in the context of global sourcing, are child labour, human
rights, and environmental issues.

Summary
This section highlighted various aspects of the procurement negotiation. It
developed a framework that supports a systematic approach to the
procurement negotiation. It also discussed on process of negotiation and
ethical Issues In procurement.
The next topic, the last topic of this course addresses performance
measurement and evaluation.

Online Discussion Activity

Study business case
Write an overview of the enclosed case (The Santek Images Business
Unit) answer the questions. Follow the “Case Analysis Guide”
(refer to Topic 2 notes).
The Santek Images Business Unit
Consolidated products is a $21 billion company headquartered in
Atlanta, Georgia. The company’s five business units, which offer a
wide array of products and services, are the result of an aggressive
strategy of mergers and acquisitions starting in the late 1980s. Exhibit
1 provides an overview of consolidated products and its five primary
business units. The corporate staff is surprisingly small, comprised of
general management, legal staff, and human resources. Part of the
reason for this small staff is due to the eclectic array of businesses
housed within one corporate entity. A business week editor recently
commented that “consolidated products could easily be broken up
into five separate companies, since at one time it was five separate
companies.” The editor also said that if the company “ever learned
how to leverage its size in the marketplace, consolidated products
could be a wall street powerhouse!”

6 Procurement Management and Global Sourcing

Online Discussion Activity
Santek Images cont’d
While consolidated products is a global corporation with facilities
around the world, it operates each business unit as a highly
independent and decentralized company. The corporate culture is
best described as entrepreneurial, with each business unit being
headed by an executive vice president who has complete profit and
loss accountability.

Exhibit 1
Consolidated Products (2001)

Consolidated Products Sales: $20.6 billion

Headquarters Location: Atlanta

Sales: $2.2 billion Engineered

Santek Images
Sales: $2.5 billion
Location: Nashville Materials Location: Chicago

Sales: $4.4 billion Sales: $5 billion

ConMed Products Industrial Systems Location: Dallas
Location: New York

Sales: $6.5 billion Pharmacon

Location: Tampa

A review of the five units indicates that each faces a wide range of
sourcing issues. Since sourcing is a process, it comes as no surprise
that some of the issues are common to more than one unit.
SANTEK IMAGES
Santek Images produces instant film and the imaging products that
use that film for industrial applications. Increasingly, Santek has
shifted much of its production requirements to overseas producers.
The outsourcing of finished products, also called contract purchasing,
represents a 180-degree shift from the vertically integrated model
that Santek pursued during the 1970s and 80s. A key driver behind the
outsourcing of non-core products was the realization that previous
ways of doing business could not support 10-20 new-product launches
a year, which is the target that Santek’s executive vice president has
established.
Many products at Santek use self-contained instant film, which Santek
refers to as media. Only one other company in the world has similar
technical capabilities. However, Santek now faces intense
competition from digital technology, forcing the unit to make digital
imagery part of its image acquisition core competency. Most
outsourcing at Santek now involves product hardware, such as the
product casing, rather than media.

Topic 10 – Negotiation, Ethics and Legal Issues 7

 Online Discussion Activity Cont’d
Santek Images cont’d
There are several reasons why Santek insources media while
outsourcing hardware. Most of the innovation that customers value
occurs within media rather than hardware, making media a primary
area to focus research and development efforts. Furthermore, the
margins for media products are higher than the margins for hardware
products. From an investment and financial perspective, limited
corporate resources are best allocated to media rather than
hardware. While hardware is necessary, it does not offer the best
financial and innovative opportunities. This does not mean that
hardware is not important. Santek recently suffered through an
embarrassing recall because a contract manufacturer produced a
finished product casing that cracked when exposed to high
temperatures (above 90 degrees).
Asian suppliers provide virtually all outsourced hardware (and
electronic) requirements. While Japan is the epicenter for hardware
manufacturing, other low cost areas in Asia are emerging. Outsourcing
to Asia offers two major benefits: access to technology and low cost.
As with most electronics and their supporting components, U.S. and
European producers are no longer competitive.
Beginning in 1996, Santek began to actively search for contract or
outsource manufacturers, particularly for camera hardware.
Unfortunately, there was no organization in place to formally support
that effort. While a small OEM group worked to find contract
manufacturers during the 1970s to 1995, Santek did not endorse or
focus on outsourcing as a key corporate strategy. As a result, creating
an outsourcing organization was not a major concern at Santek.
In 1997, Santek formed a contract purchasing organization, which has
primary responsibility for hardware outsourcing. The contract-
purchasing director (also referred to as the outsourcing director)
reports to the vice president of new product delivery. This group has
responsibility for procurement (identifying and qualifying outsource
manufacturers), product quality, and working with contract
manufacturers during new product development.
To date, the contract-purchasing director believes his staff has done a
good job of shifting production from internal to external sources. In
addition to managing two international procurement groups, the
contract-purchasing director is responsible for managing relationships
with the outsource providers. After several years of outsourcing, the
director of contract purchasing, Steve Keller, started to notice that
the performance gains from outsourcing were flattening out quickly.
When he recently surveyed his contract manufacturers about their
perception of doing business with Santek, he was surprised by their
answers.
Of the 12 contract manufacturers currently used, seven thought of
Santek as just another customer. They did not believe there was
anything unique or special about the relationship.

8 Procurement Management and Global Sourcing

Online Discussion Activity Cont’d
Santek Images cont’d
Three other suppliers expressed serious concern about doing future
business with Santek since they were dedicating their capacity
(through longer-term contracts) to key customers (who were not
competitors of Santek). Two other suppliers expressed an interest in
developing a closer relationship with Santek. It appeared that these
suppliers were developing new technology and products that aligned
well with Santek’s future product plans. These two also had the
longest working relationship with Santek of the current suppliers.
Steve couldn’t help but wonder if his group could do more to develop
or elevate the relationship with these two suppliers. And, if he could
develop the relationship, could his group achieve greater performance
improvements?
Questions:

1. Is film technology truly a core competency of Santek? If yes Why,

If not Why
2. A major challenge with an insourcing/outsourcing analysis involves
gathering reliable data. Discuss the various groups that should be
involved when conducting an insourcing/outsourcing analysis.
What information can each of these groups provide?
3. Do you think hardware suppliers are candidates for alliances or
partnerships with Santek? Why?

Source: http:www/[Link], accessed 19 Feb 2015

References
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson, James
L. (2014), Purchasing and Supply Chain Management, South-Western,
Cengage Leaming, Sixth Edition.
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson, James
L. (2011), Purchasing and Supply Chain Management, South-Western,
Cengage Leaming, Fifth Edition.
Handfield, R. B., Monczka, R. M., Giunipero, L. C and Patterson,
James L. (2011), Sourcing and Supply Chain Management, Cengage
Learning, Fifth Edition (International Version).

Topic 10 – Negotiation, Ethics and Legal Issues 9