A typical strategic procurement process involves seven major steps. Organizations will adapt this process based on the type of competitive advantage strategy they are implementing, the international procurement activity they are undertaking and their own comfort level with the applicable risk.
To be effective and minimize risk, organizations must be able to conduct their sourcing process in an organized and systematic fashion that is repeatable for all procurement decisions.
This article series will outline each step in detail, for this article we are covering Step 6: Negotiate with Suppliers and Select the Winning Bid
You can read about steps 1, 2, 3, 4 & 5 of the procurement process.
The strategic procurement team must evaluate responses from suppliers and apply its evaluation criteria. Bidding suppliers might request additional information in order to make the most realistic bid, and the organization should supply this information to all bidders and enable them to respond to the new information before making a final decision.
The strategic procurement team will then evaluate the received proposals, quotes or bids, and use the selection criteria and a process to either shortlist bidders to provide more detailed proposals (if reviewing EOIs) or select a first and second successful bidder (if reviewing RFPs or RFQs).
After the evaluation process is complete, the strategic procurement team will enter contract negotiations with the first selected bidder.
This step should include the use of legal counsel experienced in international trade as well as legal counsel from the successful bidder’s country to ensure the contract is valid for both parties and the interests of the buyer are protected and risks minimized.
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Two important elements often included in the negotiation process are bid bonds and Service Level Agreements (SLAs).
Bid bonds are surety bonds often required by importers when awarding international contracts, especially if there is no established relationship between the exporter and the importer. The bid bond ensures that exporters will proceed with bid negotiations and guarantees that the winning bidder will undertake the contract under the terms at which they bid. These securities can be set either as a percentage of the bidder’s offer or as a percentage of the budget estimate for the procurement requirement.
Bid bonds guarantee that the importer will be paid the difference between the low bid of the winning contractor and, the next closest tender price if the winning contractor fails to enter into the contract.
Service Level Agreements (SLAs)
SLAs are detailed agreements specific to the services being provided and include the metrics, key performance indicators, evaluation criteria, security provisions and audits that the service provider agrees to meet. The contract will involve the larger operational and financial clauses, including penalties and the right to terminate the service contract if the SLAs are not met. Management of the SLAs is a key component of global outsourcing governance and of relationship development with the service provider.
The following list summarizes key considerations for negotiations:
- Convince decision makers. Make sure the internal decision makers accept the mandate and the approach in order to avoid a change in direction once the project gets under way.
- Be prepared. Be thoroughly prepared with regards to the other party (business interests, cultural differences, legal barriers), the agenda, and the concessions that are feasible.
- Gauge the counterpart’s bargaining power and negotiation style. Usually one party has substantially more to gain or lose from an international venture. Over- or underestimating the balance of bargaining power can result in unnecessary concessions, perception of poor corporate fit or failed negotiations.
- Be sensitive to cultural norms. Be on time, dress in appropriate attire and demonstrate proper manners and respect. First appearances help establish the tone and trust level for further negotiations. Choosing a neutral site can help overcome or address cultural biases.
- Follow the agenda and keep detailed records. An agenda or a checklist helps keep expenses and schedules in check, limits the number of issues that can be overlooked, keeps further rounds on track and provides reference for future negotiations.
- Clearly establish the parameters for negotiations. This will avoid unreasonable offers.
- Be creative. This will increase the number of possibilities and think long term.
- Deal fairly. Exchange information in good faith and preserve a sound and respectful climate of negotiation.
- Offer sales arguments. This will help the other party defend the agreement reached.
- Consider market uncertainties and risk. In the face of market uncertainties, risk should be assumed by the party for whom it is considered to be lower.
Stay tuned for Step 7 of the strategic procurement process in this continuing series.