Lecture Purchasing and supply chain management (3rd/e): Chapter 14 - W. C. Benton

Chapter 14 - Bargaining and negotiations. Chapter 14 examines the important human interactions called bargaining and negotiation in a business setting. Bargaining occurs between individuals, groups, organizations, and countries. In this chapter we considered bargaining between two parties, each possessing resources the other side desires.

Chapter14: Bargainingand Negotiations PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement,3rdedition,Copyright2013,W. Content Bargaining • Distributive bargaining  • Integrative bargaining • Distributive bargaining experiment  • Formal negotiation  PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Bargaining Explicitbargaining Aninteractionwherepartieswithcertaindisagreementsconfer andexchangeideasaboutapossiblesolutionuntilacompromise isreachedorthebargainingisterminated PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Negotiation Thepreliminarydiscussiontobargaining Thetermsbargainingandnegotiationhavebeenused interchangeably PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TwoưpartyBargaining Bilateral monopoly system or two­party bargaining • • Bargaining that occurs between two parties who possess  resources the other desires The 2 types of two­party bargaining: • Distributive bargaining • • Psychology Integrativebargaining Economics PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargaining Definition: • • Bargaining where the total gains is “distributed” between the two  parties involved, and each party usually wants as much as it can  get Without some degree of cooperation either party can  block the bargaining Can use game theory • Varying sum bargaining Zeroưsumbargaining PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PayoffSystem Factorsrelatedtothepayoffsystem: Theamountthathastobeexceededifthebargaineristorealizea profit The cost of time spent in bargaining The cost of failure to reach agreement Added benefits achieved by obtaining a specific threshold value Qualitative or quantitative variations in the general level of payoff  values Whether payoffs are based solely on one’s own profit schedule or are  based, in whole or in part, on the degree to which one’s profits exceed  those of others Whether conflict is constant­sum or varying­sum Penalties the bargaining opponent (or perhaps a third party) is likely to  Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Payoff System Factors • Breakeven Point  • The amount that must be exceeded in the bargaining interaction  in order to obtain a profit • • Bargaining is often an attempt to convince the other person to  accept a lower value than the one he or she maintains is  necessary Bargainersresistancetomakingconcessionsispositively correlatedto Thetimerequiredtomakeafurtherconcession theprobabilityofwithdrawingfromthenegotiations PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PsychologicalBargainingFramework Six major factors affecting bargaining: 1. General  bargaining  predispositions 6. Bargaining  strategy 2. Payoff system Outcome 3. Social  relationship with  theopponent 5.Situational factors 4.Social relationshipwith significantothers PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. BargainingStrategy • • Tougher bargaining strategy • More extreme opening position • Fewer concessions • Smaller concessions  A consistent tough bargaining strategy (not fair) could  result in: • High transaction costs • Lack of future agreements • Replacement of the bargaining opponent The best strategy: 10 Always reciprocating both the frequency and the magnitude of the  PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Content Bargaining DistributiveBargaining IntegrativeBargaining DistributiveBargainingExperiment 11 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargainingExperiment Examinestheeffectofthecontingencycompensationon bothbuyersandsellers Situation Anagreementhastobereachedonthespecificationsofthe producttobeboughtandthemoneytobepaid Boththesellerandthebuyercanmakeconcessions 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargainingExperiment(cont.) Findings: The buyer’s initial offer is always above the seller’s reservation  price The negotiator’s payment system has significant effects  When only one party is contingently rewarded, o • o the effect is to shift the settlement in that party’s favor    When both parties are contingently rewarded, • There is a much longer and more difficult negotiation process 13 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Distributive Bargaining Experiment (cont.) • Implication: Contingent rewards make a difference in negotiation outcomes Purchasing organizations need to be aware of the  salesperson’s reward system Management must develop stronger contingencies to  encourage purchasing effectiveness 14 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Formal Negotiation Seller’s Perspective VS Buyer’s Perspective 15 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            The Buyer’s Procedure for a Formal  Negotiation Follow­up Develop tactics to achieve the strategy Set strategy based on objectives  Develop the plan Determine bargaining strength Prepare a price/cost analysis Determine objectives Select team and chief negotiator 16 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Questions? 17 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            ... Select team and chief negotiator 16 Purchasing and Supply Chain Management,  3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Questions? 17 Purchasing and Supply Chain Management,  3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.           ... Anagreementhastobereachedonthespecificationsofthe producttobeboughtandthemoneytobepaid Boththesellerandthebuyercanmakeconcessions 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargainingExperiment(cont.)... The best strategy: 10 Alwaysreciprocatingboththefrequencyandthemagnitudeofthe PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Content Bargaining DistributiveBargaining