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ONLINE EXCLUSIVE: PURCHASING POWER
Buying Thermal Processing Equipment - Part Six:
Negotiate Purchase and Performance Agreements

May 1, 2004
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In this sixth and final column in the "Purchasing Power" series, learn how to maximize your negotiation leverage, address proposal discrepancies with vendors, ensure all your business needs will be met, and establish reasonable performance measures that will help keep the project on track.

The information you have gathered and compared up to this point will help make your final supplier selection an objective process resulting in maximum value while meeting all of your needs. Your objective should not be to bludgeon suppliers into severe price reductions that can result in unspecified reductions of quality or technical support. Rather, the process will empower you to make decisions based on comprehensive value instead of on subjective preferences, which enables you to negotiate from a position of strength that is both fair and reasonable.

Negotiation tactics are not addressed here in detail, though several suggestions are offered. I assume you or a team member possesses the necessary negotiation skills. The main focus here is to ensure you have the right information at hand for effective decision-making and negotiations. With reasonable negotiation skills and the information described below, you should be able to save from tens to hundreds of thousands of dollars on your equipment investment, depending on the size of your project.

Strategy Documentation

Early in the process you created an internal strategy document, which included project specifications. This document was a road map that your team should have referred to frequently throughout the process of evaluating suppliers, comparing proposals and creating a comparative matrix. This is your most powerful tool for ensuring full compliance with all of your needs, and the resulting supplier matrix can give you tremendous clarity in the final evaluation and decision-making process.

Creating Clarity

With your comparative matrix in hand, start by answering the following questions:
  • Are all details in the matrix taken directly from supplier proposals, or were some blanks filled in by team members based on verbal information from suppliers? Make sure that suppliers provided all details in writing. Copies of supplier proposals and related correspondence should be included.
  • Has all comparative information been provided in an easy-to-use format? There are many good ways to make a comparative matrix. Can you find and compare key information quickly and effectively?
  • How many fully compliant suppliers have been identified and qualified? Hopefully there are at least two, and preferably three.
  • Is there a clear supplier preference based on all data gathered? If there is, carefully guard that information. You certainly don't want a supplier to know they are the favorite, as it will weaken your negotiation position.
  • What supplier limitations have been identified in the process? These issues will need to be addressed with individual suppliers. For example, will a supplier outsource some critical work on the project? Is a supplier booked solid for the next four months? If a team member raised a red flag of concern during the process, now is the time to get information from suppliers on how they plan to deal with a particular limitation. You need to gauge the viability and risk associated with their plans when making decisions.
  • What extraordinary opportunities have been discovered? Perhaps by choosing a particular supplier, they can meet all of your needs AND provide you with significant additional benefit. This can weigh into your final decision.
  • What proposal discrepancies or other concerns should be focused on with each supplier? When you start your final discussions with suppliers, they need to know what your greatest concerns with their proposals are. You must be satisfied that any discrepancies will not jeopardize the total success of your project.

Financial Comparison

A good cost comparison is based on more than prices in proposals. In addition to baseline equipment prices and separate options pricing, the following should also be considered. Add this data to your supplier matrix only for the final contenders.
  • Internal value of extraordinary supplier capabilities. For example, if a supplier has a track record of successfully providing process development assistance to clients, and this of major importance to you, that access to expertise may be worth an additional amount. You must determine what amount you are willing to pay, and that becomes your internal value. The track record should also be verified-you want the real thing, not just a promise of it.
  • Internal value of accelerated or delayed schedule. If you get the equipment installed and in production sooner than requested, how much would that be worth? Likewise, if the project is a month or more late, how costly will that be for your company? Include both values in your matrix.
  • Value that should be applied to any risks identified.If your matrix indicates that a particular supplier is a strong candidate except for one or two areas of concern, determine a dollar amount that can help mitigate the risk. Full payment of this amount could be negotiated upon successful performance of specific requirements.
  • Cost of crating, insurance, freight, taxes, etc. In a close contest, these amounts could make the difference.
  • Cost of any extraordinary items related to choosing a particular supplier. Will choosing one supplier require more or less expense for you either before or after the order is placed?

    Your Schedule

    Six distinct phases exist between the ship date and the date you put the equipment into production. Your supplier discussions should address each of these phases, and have reasonable time frames and resources allocated for each:

    1. Ship date-the date the manufacturer will ship the equipment from their factory.
    2. Delivery date-the date the equipment will arrive at your facility.
    3. Installation schedule-the time frame for physically installing the equipment at your facility.
    4. Start-up schedule-the time frame for applying power and other utilities to the equipment to confirm operational readiness.
    5. Commissioning schedule-the time frame for fine tuning the equipment and testing its performance before turning it over to your production department.
    6. Production start date-the date you expect to be able to start producing salable product from the equipment.

    Terms and Conditions

    In your comparative matrix, a team member has added key discrepancies between your standard terms and conditions and those included in supplier proposals. In preparation for supplier negotiations, also determine the following:
    • Your terms and conditions that are inflexible.
    • Your terms and conditions that are negotiable.
    • The value of your terms and conditions that are negotiable.


    Performance Agreements

    The details of equipment performance agreements are often neglected at the time of sale, and this can lead to a great deal of frustration and expense for buyers and suppliers at testing time. As you narrow your qualified supplier list down to two or three candidates, you should conduct detailed discussions with them about performance testing. The following questions will help you establish performance measures that are meaningful and reasonable.
    • What are the key performances of the project?
    • How will key performances be demonstrated and measured?
    • What are the ramifications of delays in meeting key performances?
    • What are the ramifications of failure to meet key performances?
    • Exactly what testing will be performed as a condition of the project?
    • Who will write and approve the testing procedures?
    • What the responsibilities of buyer and supplier in regards to testing?
    • What additional costs may be associated with this testing?
    • What is the time frame for the testing described?
    • Are the tests fair and reasonable?
    • Will the tests demonstrate full compliance with all key project objectives?
    To a large extent, the establishment of good performance agreements is a collaborative process between buyers and suppliers. The clarity that results from this process will benefit all involved, and help reduce your risk on the project.

    Making Your Final Decision

    Armed with all this information, it should be easy to identify the ideal supplier for your project. When you enter the negotiation stage in preparation to place an order, you can have frank and specific discussions with suppliers about prices, specifications, limitations, terms and opportunities-all the details you need will be readily at hand. And when it comes down to making concessions, allow me to offer this single powerful negotiation principle:

    Never give something away without getting something in return.

    This is the process. It can be adapted to meet the needs of both simple and highly sophisticated projects. When done effectively, the results will be highly gratifying for team members, your business, and even for selected suppliers.

    If you have any additional questions about the process, I invite you to contact me directly.

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