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Negotiate with Suppliers

Discussions and negotiations are not the same. Discussions are communications between the Purchase/SCM Team and offerors. Generally, negotiations are held with one or more suppliers after the Purchase/SCM Team has determined through either discussions or the Proposal Evaluation Team's recommendations, that the Supplier's (or Suppliers') proposal has the best chance of providing the Postal Service the best value. The goal of negotiations is to come to final agreement on contract terms and conditions, including contract type and price.

When negotiating, the Purchase/SCM Team must remember that the Client's needs, the purchase plan, and best value are the forces that drive all actions. The negotiation process will also be impacted by the establishment of detailed objectives regarding the aspects of contract performance, including:

Technical implications

Materials

Logistics network

Inventory management

Warranties

Payment terms

Data and intellectual property rights

Investment recovery and disposal

Price

Negotiation Considerations

The Contracting Officer leads negotiation planning and is responsible for the conduct of the negotiations, and will begin by attempting to resolve any points of conflict that remain after discussions. However, depending on the issues to be negotiated and the experience of the Purchase/SCMTeam members, different team members may take the lead on negotiating specific issues in accordance with the negotiation plan. Before opening negotiations, the Contracting Officer and the Purchase/SCM Team must clearly categorize negotiation objectives that are either must points (terms and conditions essential to desired contract performance that the Postal Service must obtain), or give points (terms and conditions that are not central to the Postal Service obtaining best value). Must points and give points are determined by Client requirements, but the Contracting Officer will leverage past experiences and knowledge when negotiating these points. In order to avoid deadlock, the Contracting Officer will have to properly balance what is given and what is taken, especially as final agreement becomes more imminent, while focusing on obtaining the must points.

For example, negotiations are held with a Supplier that has a proven record of on-time delivery (a shared interest and a must point for the Postal Service), but is also proposing a price higher than the target price generated by the Pricing Analyst (a point of conflict but also a give point). In a compromise, the Postal Service would give the Supplier a higher price than the one recommended by the Pricing Analyst, but one lower than that offered in the original proposal, thereby obtaining the on-time delivery level determined essential to contract performance and improved price terms.

In the rare instance when a proposal has no points of conflict, pricing is at or below market price, and the proposal obviously offers the best value, neither discussions nor negotiations are necessary. However, Purchase/SCM Teams should always remember (1) that holding discussions for reasons of clarification is always prudent and (2) that negotiations normally should be held in order to improve the value received by the Postal Service. In cases where neither discussions nor negotiations are necessary, the Purchase/SCM Team begins the activities associated with the Ensure Supplier Diversity Objectives are Considered topic of the Perform Pre-Award Activities task of Process Step 2: Evaluate Sources.

It is important to note that negotiations are a complex process based on preparation, leveraging power, personal dynamics and compromises that vary from contract to contract. Negotiations are seldom predictable and are never a guaranteed success. Therefore, negotiations must always be rooted in facts generated during discussions, as well as market research and price analysis, and Postal Service objectives in order to maintain and avoid damaging historical working relationships with suppliers. Ultimately, the level of mutual dependency (the Postal Service need for a supply and the Supplier's need for clientele) is the greatest source of motivation for the two parties.

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Prepare for Negotiations

Almost all successful negotiations are the result of preparation. Before entering a negotiation, the Contracting Officer and Purchase/SCM Team should:

Have comprehensive knowledge of the marketplace (generated by market research)

Have comprehensive knowledge of the Supplier

Have thorough knowledge of the goods or services to be supplied

Have thorough knowledge of the price of goods or services to be supplied (generated through price analysis)

Understand the Postal Service's leveraging power

Understand the Supplier's leveraging power

Analyze involved costs (generated in the Conduct Should-Cost Analysis topic of the Collect Ideas and Build Fact Base task of Process Step 2: Evaluate Sources)

Understand the Supplier's capabilities (generated in the Conduct Supplier Capability (Technical and Financial) Analysis topic of the Evaluate Proposals task of Process Step 2: Evaluate Sources)

Understand the Total Cost of Ownership

The next step is to establish the Postal Service's negotiation strategy incorporating this information. A negotiation strategy is formally planned and requires the generation of all Postal Service objectives, any remaining points of conflict, their importance in determining best value, and the strategies that will be used to address them.

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Best Alternative to a Negotiated Agreement (BATNA)

In developing its negotiation strategy, the Postal Service should identify what is the Best Alternative to a Negotiated Agreement (BATNA). The BATNA is the next best alternative, or "walk away" alternative, should negotiations fail with the selected supplier. It is a key component of any negotiation strategy. Identifying the BATNA (e.g., an alternate supplier, manufacturing in-house, canceling the solicitation) will help determine the Postal Service's leveraging power depending on the desirability of its BATNA.

Conducting Negotiations

During negotiations, the Contracting Officer must leverage the negotiation strategy, which defines the importance of each issue and ensures that interactions with the Supplier are confined to these issues. Each issue should be treated individually, usually in order of ease of resolution.

Depending on the complexity of the product or service to be purchased the Contracting Officer will involve the Client, Legal Counsel and other members of the Purchase/SCM Team in the negotiations with the Supplier. The negotiations strategy will identify which team members will take the lead role in negotiating different aspects of the proposal. Outside expertise can be used during negotiations, but Contracting Officers must take steps to ensure that the potentiality for organizational conflicts of interest is minimized.

Documenting Results

Once negotiations have concluded, the Contracting Officer is responsible for documenting their substance and the extent to which they were successful. The degree of success will depend on whether the negotiations fulfilled the intent of the negotiation strategy. Documentation must be in writing and included in the contract file.

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Quadrant Approach

A quadrant approach classifies all Postal Service purchases into four categories, depending on their impact on the Postal Service core competencies (noncore versus core) and complexities (standard versus custom). Negotiations can be prioritized based on the type of purchase, as well as its overall impact on the Postal Service.

Figure 2.16

Four Quadrants

Figure 2.16 drawing showing four quadrants

Quadrant I: Noncore/Customized Purchases

Goods and services in Quadrant I do not provide direct value, and are therefore considered to be a lower priority for negotiations. Because these goods are more customized, and there may be a limited supplier base, negotiations can be beneficial in the achievement of best value, especially in a monopoly situation. When a contract to supply these goods or services is negotiated, the Contracting Officer may conduct them with some support from the Purchase/SCM Team and Legal Counsel.

Quadrant II: Core/Customized Purchases

These products and services create direct value, and are therefore of high importance in negotiations. Negotiations pertaining to these products and services require a team comprised of the Contracting Officer, supported by the Purchase/SCM Team and Legal Counsel.

Quadrant III: Noncore/Standard Purchases

Products and services that fall into Quadrant III do not provide direct value, and are therefore a lower priority for negotiations. When a contract to supply these goods or services is negotiated, the Contracting Officer may conduct them with some support from the Purchase/SCM Team and Legal Counsel.

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Quadrant IV: Core/Standard Purchases

These products and services create direct value, and are therefore of high importance. Negotiations pertaining to these products and services require a team comprised of the Contracting Officer, supported by the Purchase/SCM Team, and Legal Counsel.

Other Topics Considered

Conduct Market Research and Benchmarking Analysis topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Conduct Should-Cost Analysis topic, Collect Ideas and Build Fact Base task, Process Step 2: Evaluate Sources

Perform Proposal Evaluation Strategy topic, Perform Solicitation-Related Activities task, Process Step 2: Evaluate Sources

Conduct Supplier Capability (Technical and Financial) Analysis topic, Evaluate Proposals task, Process Step 2: Evaluate Sources

Hold Discussions topic, Evaluate Proposals task, Process Step 2: Evaluate Sources

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