Any profession can
fall victim to damaging myths that build up over time. Mike Phillips debunks
some of the enduring favourites in purchasing.
1. If a supplier
agrees to reduce prices, they’ve been ripping us off before.
Taking this stance betrays a fundamental misunderstanding of
business and, more importantly, fails to recognise an important negotiation
dynamic. In purchasing, a key part the job is to achieve good value and this of
course involves buying at a competitive price. If you achieve a lower than
average price, you have likely done your job well. If some time later the
seller comes to you requesting an increase because the price is not
sustainable, would you feel that you have been found out as exploiting the seller?
In reality, I think most buyers would blame the seller for not putting forward
a sustainable price in the first place. But now flip the situation around, and
imagine you are the seller. Your task is to sell your product or service at the
highest price that the customer is be willing to pay. If you are good at your
job, and you manage to achieve a higher than average price, are you ripping the
customer off? Provided you have presented a truthful picture of the benefits of
the product, then I think not. A contract requires agreement. If the customer
has agreed to the price, then the price is, by definition, fair.
However, far more important is the damage this myth can do
to a negotiation. When seeking to persuade a supplier to reduce prices, it is
critical to create the intellectual and emotional space to enable the supplier
to do what you want. Sellers are not stupid. They can see this myth can arise
in the mind of the buyer. It is vital to focus the supplier on the future.
Explicitly state that the past is the past and no offence will be taken if the
supplier agrees to reduce the price. However, allow this myth to arise, and you
will fatally damage your negotiation.
2. If raw material
prices increase, then it is reasonable to increase the product price.
There is in fact one circumstance where this is true – when
a raw material price adjustment mechanism has been explicitly agreed in the
supply contract. This is actually good procurement. If you are purchasing a
product with a significant cost element made up of a volatile commodity, you
will achieve a lower initial price by offering the supplier a raw material
price adjustment clause. Without it, the supplier will have to give you a
higher price in order to cover the risk of the commodity increasing in cost.
However, without specific prior agreement, it is not
necessarily true that it is reasonable to increase the product price as a
result of raw material increases. The buyer should expect to get a benefit from
agreeing to a price adjustment clause. Allowing the seller at a later date to
adjust the price without a prior agreed mechanism is effectively giving the
mechanism without getting anything in return. In this situation, we have to go
back to the market to confirm the competitiveness of the new product price. If
the market confirms the requested price is still competitive, then the increase
may be reasonable. It is the product marketplace (not the raw material
marketplace) that defines the reasonableness of the increase.
3. Maintain control
of the negotiation by being assertive.
Too many buyers make the mistake of feeling that controlling
every aspect of the negotiation will maintain the upper hand. This is damaging
on two fronts. Firstly, the other party may respond to the controlling
behaviour in a competitive manner. Great negotiation is about persuasion, not
competition. As soon as you allow the impression to form that the situation is
competitive, then you risk both parties becoming focused on winning, rather
than achieving their objectives. This is the way to a lose-lose outcome, rather
than a win-win.
The second damaging aspect of this myth is that it fails to
recognise the value of giving way on what does not matter but holding firm on
what does. For example, whenever possible, have meetings at a time and venue
convenient to the supplier. This will very likely cost little but the
psychological benefit to the negotiation can be considerable.
This ‘giving things of low value’ technique is why personal
charm, which of course costs nothing, is an extremely important quality in
purchasing. A great buyer will use personal warmth and courtesy as much, maybe
more, than a great seller. Focused solely on achieving his/her objectives, a
top-class buyer will remain patient and courteous for as long as it takes,
provided the objectives continue to move closer as the discussion progresses.
Good manners are a very effective persuasion tool.
4. There is no other
supplier than can provide this product/service.
I have lost count of the number of times that a buyer has
said this to me. However you interpret this statement, it represents a
significant purchasing failure. If it is true, the situation presents an
unacceptable logistical and financial risk. With no alternative source, any
failure to supply has potentially catastrophic consequences. Further, the
monopoly situation presents the supplier with an opportunity to increase prices
without the restraining influence of the marketplace.
However, this is not an argument against sole-source supply
agreements. Properly constituted sole-source agreements provide major
procurement benefits and will of course include supply risk assessments and
continued price competitiveness clauses.
In reality, of course, it is extremely rare for there to be
a genuine and enduring monopoly situation. The buyer believing this myth needs
to get on with identifying alternative sources. Allowing an apparent monopoly
situation to remain in place must always be considered unacceptable. In fact, very
few companies have no competition. When they do, it does not last long. But in
the rare circumstances where this does happen, it is a situation that must be
immediately mitigated or eliminated.
5. A contract must be
signed to be valid.
Although this is an issue of basic contract law, it is
surprising how many buyers (and sellers) believe this myth. And, of course, this
is an enduring myth in the general public.
Space does not permit any in-depth discussion, but at a
basic level a valid contract in English law requires offer, acceptance and
consideration (that is, usually money). The key issue here is the question of acceptance.
Nothing in English law requires acceptance by way of signature. When you buy a
newspaper, the vendor offers it at the face value, and you hand over
consideration (money), which is deemed as acceptance – a valid contract is
formed. In essence, this is no different than contracts formed every day in
corporate purchasing departments.
Case law has established that actions can be deemed as
acceptance. Consequently, if a contract is negotiated, agreed and implemented
by both parties, it will be extremely difficult to claim that a valid contract
does not exist because of a lack of signatures.
Of course, it can often be good practice to get both parties
to sign, but it is important for buyers to understand that a failure to do this
does not prevent a contract being formed.
Mike Phillips is
managing partner at negotiation specialists, Phillips Consulting
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