Diploma in Procurement & Supply Negotiation and Contracting in Procurement and Supply Introduction to the unit Basic concepts and approach

Overarching Learning Outcomes (knowledge and understanding) By the end of this unit you should   Understand the legal issues that relate to the formation of contracts (1.0) Understand the main approaches in the negotiation of commercial agreements with external organisations (2.0) Understand how to prepare for negotiations with external organisations (3.0)    Understand how commercial negotiations should be undertaken (4.0) These are the overarching learning outcomes for this unit expressed in terms of knowledge and understanding. However it is very difficult to adequately assess overarching knowledge and understanding without breaking these outcomes down into sub outcomes expressed in terms of what you should be able to do. So at this stage we would suggest that you look at the syllabus to get a clearer idea of what these more detailed learning outcomes involve, because this is effectively what you will be assessed against during the examination. Each individual session will be directly linked to the appropriate learning outcomes, and these are summarised at the beginning of each session. When you finish working through a session we would suggest that you review these session learning outcomes to ensure that you are able to complete the tasks and processes defined in these outcomes.

Learning outcomes for this introductory session By the end of this session you will: Be aware of the broad requirements of this unit Be able to relate these requirements to the structure of this learning site Think about your own style of learning and develop an approach to learning that best suits your requirements Be aware of some basic concepts relating to the nature and role of procurement and supply

How is the learning structured for this unit? The unit is divided into 8 learning sessions as follows: Session 1 – Documentation and types of contractual agreements Session 2 – Legal issues Session 3 – Application of commercial negotiations and types of approaches Session 4 – The role of power and different types of relationships Session 5 – Cost/price analysis and economic factors Session 6 – Negotiation variables and resources Session 7 – Negotiation stages, persuasion, tactics and influencing Session 8 – Communication skills and analysing negotiation outcomes It would normally take one week of study to complete one session, whether you are studying through distance learning or part time evening modes of study. Intensive weekend students would probably be able to work through the sessions a little more quickly after attending the weekend session. The syllabus is broken down and is contained within these eight study sessions.

How do we learn? We perceive the world around us through our senses and store and process this information in the form of memories. So these memories will be: Visual Auditory Kinaesthetic (feelings – physical and emotional) Gustatory Olfactory These memories form the basis of our learning Follow this link to find out more about preferred learning styles Learning Styles

Negotiating and Contracting – some basic concepts The remaining slides for this introductory session look at some important basic concepts relating to negotiating and contracting

What is a negotiation? A negotiation is: A process Involving more than one party With a purpose Seeking to reach agreement There is no one single definition of ‘a negotiation’. A negotiation is a process comprising a number of recognised stages. A negotiation involves one or more parties and there will be a specific purpose, for example to achieve a price reduction or to change a specification. The essence of a negotiation is that an agreement on a point, or number of points, is aimed to be reached.

When might the need to negotiate arise? There are potentially many situations in procurement and supply when a negotiation might be necessary, eg to:- Resolve a dispute Change terms Improve supplier performance Negotiation is commonplace in procurement and supply and the need to negotiate with suppliers (and stakeholders) will arise frequently. Negotiation is the most common form of dispute resolution technique, which avoids the need for the parties (to the contract) to seek a solution through other means (for example mediation, arbitration or litigation).

Key considerations in negotiating There are many considerations, including:- Relative power/dependency between the parties The importance of the contract to the purchaser (risk versus contract value) The importance of the contract to the supplier (client attractiveness versus contract value) The relationship between the purchaser and supplier Urgency of the need Size of the supply market Planning and preparation ahead of a negotiation is vital. This should incorporate a number of key considerations. There are tools and models which can be used to help the purchaser prepare for a negotiation and these will be dealt with throughout the study programme.

What is a contract? The existence of a contract is fundamental to contracting in procurement in supply A legally binding agreement Between two or more parties Verbal or in writing Must meet the recognised ‘tenets’ of a contract It goes without saying that some understanding of the basic principles of contract law is essential when contracting with suppliers. Contracts are legally binding, whether verbal or written (NOTE – contracts for the purchase of land/property, in England) only become legally binding when contracts have been exchanged, but all other contracts between purchasers and suppliers are no less legally binding if agreed orally). The recognised tenets are:- Offer Acceptance Consideration Capacity Intention. This will be dealt with later in the study programme.

Why is contracting important? Contracting, arguably, lies at the heart of procurement and supply, it:- Establishes the framework within which the contracting parties agree to operate Sets out the responsibilities of all parties Provides direction for both parties to ensure that the contract is delivered correctly (in accordance with the purchaser’s requirements) Contracting is fundamental to procurement and supply and underpins the relationship between buyers and suppliers. The contract is not set in stone and will often evolve over the life the of contract.

Key principle Caveat emptor This is the legal principle that underpins procurement and supply. It is a Latin phrase and means ‘let the buyer beware’. This is important because, at law, the courts generally apply this rule and expect the purchasing organisation to have carried out proper checks before entering into legally binding contracts.

Financial considerations There are many financial considerations in negotiating and contracting, for example:- Using techniques to achieve the best price Using financial levers as a bargaining technique Analysing and understanding different types of costs Considering the supplier’s break-even point Assessing supplier profitability Of course financial aspects are not the only consideration, for example quality, service and delivery are all important in contracting. However, achieving the best possible ‘financial value’ is always high on the purchaser’s agenda. ‘Price’ is what the purchaser has to pay for the goods/services and ‘cost’ relates to how much it actually costs the supplier to deliver the contract. The difference between price and cost is the supplier’s profit. There are different types of costs, for example fixed and variable, and direct and indirect. Where the supplier has achieved break-even point it is already covering its fixed costs. There are different methods of describing profitability. The supplier’s margin is its profit expressed as a percentage of revenue (ie its price). The mark-up is profit as a percentage of costs.

The external environment And of course business is not conducted in a vacuum. All organisations will be impacted by the external environment PESTEL analysis is an effective tool for considering the macro environment and its impact on procurement and supply Political Factors Economic Factors Sociological Factors Organisations will be impacted by internal factors, eg their budgets, resourcing, policies, priorities and strategy. These factors are controllable. External factors are beyond the direct influence of the organisation. The micro environment includes the organisation’s suppliers, distributors and competitors. The macro environment are broader factors which are likely to impact all players within an industry sector. PESTEL analysis is used to assess these macro environmental factors. Technological Factors Environmental Factors Legal Factors

The work of the Chartered Institute of Purchasing and Supply This short youtube video is a CIPS corporate video and it outlines the areas that the institute is currently involved in. http://www.youtube.com/watch?v=OZk_-krZhWA