Wednesday, January 26, 2011

Pre-qualification - Negotiation in the Pre-qualification phase

Many people think that the goal of a supplier qualification process is to ensure that the supplier has the capabilities and financial resources to perform the work. The seasoned negotiator knows that it also provides an excellent opportunity to gather information about the Supplier that they will use to define what additional controls or requirements may be needed in the agreement to effectively manage the supplier. They will also know it represents a opportunity to get at information that they can use to help them in the negotiation.

It is important that information be sought in the pre-qualification stage where the supplier's employees will frequently "open their Kimono" and share information athat may be later used against the Supplier in the negotiations. Once the actual negotiation process starts, the flow of information will be controlled. The following is a sample list of activities you would perform in a qualification, with a description of how you should be looking at them from a negotation perspective.

Stages of Pre-qualification                            The negotiation perspective.
Identify Potential Supplier sources
Solicit Supplier Survey
Use the survey to solicit both information which helps you "qualify" them but also provides you key information about them and their character which can be used in the negotiation. For example, you could ask for information about quality levels, warranty returns, quality returns etc.
Evaluate Supplier survey
Identify gaps to determine additional things to probe during the interview.
Start to determine key information that you will use in the negotiation.
Perform evaluation of Product
Identify any shortcomings that can be used to drive the price down. E.g. lack of features, not an exact match with needs.
Conduct Interview:
Purchasing checks Customers, References, Business terms, Ownership/Potential Conflicts Futures, apacity, Flexibility, Organization, Key Personnel, Customer User Organizations.
Finance (or Purchasing) checks: Basic financials, Annual reports, Financial statements, Creditors, Bank references, Trade references, Major risks.      
Engineering and Quality checks: Design resources Design capabilities Design rules Design tools - CAD etc. VA/VE activity Special expertise Quality processes, Quality controls , test, Reliability programs.
Manufacturing Engineering checks: Facilities, capacity, flexibility, production equipment, manufacturing processes, process control, tooling, documentation, change control.
Field Service checks Repair capability, repair quality, repair channels, Long term support, training, parts availability, Repair cost, turn times.
In addition to helping you determine whether the Supplier is qualified to do the work, all this information should be used to understand the Supplier's character, and where controls may be required to manage performance. Identify where the Supplier has shortcomings that can be used to justify contract requirements.
Tour their facility.
See what they are doing, how they manage the business, the tools they have. Look at who their customers are. Look at who their suppliers are to see their qualify and character. Understand their process and quality steps. Look at capacity to understand how much they need your business. Look for indicators of problems (high volume in warranty or returns areas, large re-work area for production). It will give you a better understanding of the character of the Company and where extra controls may be needed or the contract changed.
Probe for information
Drill down from the general information provided in the Supplier survey form to understand the specifics that may impact you. For example, if you were dealing with a company with multiple offices, you may need to find out the specifics about the particular office that you would be using. This is important in service related activities where you are relying upon the people and capabilities of the local office. Each office may have
a different character and different skills depending upon their customer base. Each may be organized to deal with that customer base.
Have them present a representative project
Have them walk through the project and  explain how they managed it. Understand their basic capabilities. Probe about who did what. An  individual who was a major factor of the success of a prior project may no longer be with them, that would change their true
capabilities. Look for management structure or approach. Is it incompatible with your needs
Ask for representative samples of the drawings and technical specifications
Determine the quality and depth of the product. Look for shortcomings that can be used to help negotiate.
Check their management systems for  scheduling, buying of equipment and materials, quality processes, field service and support capabilities.
Understand what you are getting and use the information on shortcomings to help negotiate requirements or commitments.
Use the interview to get you information you need to help you make decisions you need on the Project
Have them recommend contracting approaches, form of contract, estimate of project schedule, critical equipment and lead times.  Use that to check your requirements.
Meet the person or team who they will assign to program.
Understand whether they are of the experience and skill level to both manage the program and warrant the cost. Use shortcoming to negotiate additional commitments or reduced fees.
Check references on the Company.
Company provided references will always be positive. Solicit other sources (e.g. customers you identified in the interview, look at who they are shipping to). Find out when, what they bought, the type of job, the supplier's role, the type of contract, etc. Ask for everything the reference would be willing to share, especially pricing, treatment of changes, claims, performance. Use that information in the negotiation to substantiate contract requirements, demands for reduced pricing, incentive, etc.

Perform a financial evaluation of the Company.

Look for critical financial factors which will help negotiate top value items which are critical to them. For example, you might consider a large, upfront payment in return for a substantial discount for suppliers with a large cash flow problem or with a high cost of money.
Review all of the information to determine what changes to your standard contracts are required to effectively manage their performance and how you will use the information against them in negotiating the agreement 

I have been in a number of negotiations where the Supplier wanted to either charge additional costs because of our requirements or fought accepting some of out terms as they required them to do something unique. The problem for them was I had toured their plant I knew what their standards were. Many times their standards were exactly the same as what we required. When I would point that out to the other side, the request would be withdrawn or the position would change. If you don't tour their operation you'll never know what the baseline is to measure against in price negotiations.

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