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Using Day One Analysis to drive out value in negotiations

Value creationSupplier relationship managementSupply chain financeContract managementCost and Cash Management+-
negotitoan 2

Day One Analysis can be helpful when it comes to negotiation planning as it can be utilised to give an insight into what opportunities might exist. It can also help determine the value and relationship objectives that would be most compatible with the negotiation.

 

Here is what it is and how you can utilise it.

 

Start with a graph

 

To use it, all you need to do is plot on a matrix the categories, areas of spend or products you are planning to negotiate. Do this according to the number of suppliers that could potentially supply the category or item, against the number of buyers.

 

Make sure though that you fully understand the axes for this analysis. They are not sliding scales and, while there may be either one or more supplier or buyer, there is no middle ground.

 

Utilise group thinking

It is helpful to do Day One Analysis in a group, as it will typically spark discussions regarding differences in outcomes or positioning, depending on how people view the goods or services they are attempting to negotiate. This type of discussion is good and differences will often reveal insights into what is happening.

Using the matrix above, these are the potential negotiation approaches for each of the quadrants:

 

Generic

 

This is where there are many suppliers and many buyers. In this quadrant we have the greatest choice and ability to switch, so the power lies with the buyer. For a single negotiation it is unlikely that there will be a need for an ongoing relationship with the supplier unless, of course, there are wider or longer term needs. The supplier’s mindset is about beating the competition, so a value claiming negotiation stance is normally the most suitable approach.

 

Tailored

 

Here the products and services are made uniquely for the organisation so while there could be many suppliers, there will be only one buyer. Anything that is branded or made to a unique, business-owned specification fits here. The supplier’s focus is on selling its process and capability. Because of this, a buyer may need some sort of relationship with the supplier, perhaps to facilitate day-to-day interactions between companies that support the goods or services.

 

As there is more than one supplier, the buyer again holds power so, in theory, it is possible to switch suppliers to gain the best value. However, issues may arise during the switching transition, particularly around ensuring the new supplier is fully aware of a buyers specific requirements, the manufacturing, or service provision process. Depending upon the circumstances, a buyer we could adopt a value claiming or value creation negotiation approach.

 

Custom

 

As the name suggests, this quadrant features the things that are custom-made for a buyer by just one supplier. Either the buyer or the supplier may have a unique process or patented component that can only be made by or sold to the other party.

 

Here, buyers will undoubtedly need a strong, collaborative and long-term relationship with the supplier. It’s important to keep in mind that the supplier may have accumulated certain know-how regarding the manufacture or service provision, so a buyers dependency on them is increased.

 

The balance of power between the buyer and the supplier will most likely be shared but that’s assuming the buyer has managed the relationship well. Value claiming negotiation approaches are entirely inappropriate; value creation approaches typically yield the best outcomes.

 

Proprietary

 

Proprietary, involving one supplier but many buyers, is ideal for suppliers as it gives them the power and control. Suppliers will work to identify ways where a buyer can only go to them for products, such as through:

 

  • Differentiation – making a product/service unique in some way.
  • Added value – including additional products/services with the aim of creating real or perceived additional value for money.
  • Convincing a design team to specify make and part number on a drawing or specification.
  • Bundling different generic or tailored products/services together to create a unique offering.

 

Here, the supplier does not need a relationship with the buyer, but may cultivate a superficial one to shore up their position. While there may be little point in building a collaborative relationship with them, by building a similar relationship that seeks to make and keep buyers attractive to the supplier, it can help secure the best terms.

 

In terms of value objectives, buyers have little power to drive value claiming, and value creation could end up a one-way street on the buyers part. Yet both approaches are valid and work to a degree providing the constraints are kept in mind.

 

A powerful tool

 

Day One Analysis is a powerful tool that helps buyers understand their negotiating stance and also helps determine the type of negotiation that could maximise outcomes.

 

It may be simple to understand and simple to apply, but can make a world of difference.

 

This article is adapted from Negotiation for Procurement Professionals (9780749477301) by Jonathan O’Brien © 2016 and reproduced by permission of Kogan Page Ltd.

This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.

Jonathan O'Brien
Posted by Jonathan O'Brien

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