NEGOTIATION SKILLS AS A TOOL FOR ENHANCING TIMELY DELIVERY OF MATERIAL

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Effective Negotiation

Negotiation in the real world is a complex process (Thompson 2000). Negotiation can happen in a variety of ways: in personal lives, in business and government, and in international diplomacy. (Kim and Segev 2005). Furthermore, negotiation is a critical aspect of purchasing and supply chain management. As the business environment becomes more dynamic, negotiations between partners are required more often (Cerquides and Sanchez 2008). Furthermore, Sheer and Chan (2003) pointed out that business negotiators need to be knowledgeable in certain areas of business such as management, product quality, technical specifications, equipment purchasing and deployment, and distribution and supply networks, in order to ensure that negotiation with trading partners can be undertaken effectively. Negotiation is a process of joint decision-making in which people with different preferred outcomes interact with each other in order to resolve their differences (Thompson 2000). Negotiation becomes a key decision-making approach used to reach consensus whenever the partners cannot achieve their business objectives (Thompson 2000). Brett (2000) argued that while discussing the concept of negotiation, it is important to understand that negotiation involves certain types of criteria. These criteria include:

• Direct confrontation – Negotiation can involve direct confrontation, either face-toface, electronically, or through agents or intermediaries.

• Types of negotiation – Negotiations may be transactional with buyers and sellers, or can be directed towards the resolution of conflict or disputes.

• Distributive and integrative agreements – These two types of agreements are related to the type of negotiation chosen, and are the result of transactional or conflict resolution negotiation, or may be purely distributive or integrative agreements.

• The process that leads to distributive and integrative agreements – In order to understand the negotiation process that leads to distributive and integrative agreements, there is a need to understand how information is used during negotiation.

Monczka et al. (2004) noted that Negotiation is an ultimate value to implement the purchasing strategies that an organization developed. Negotiation will be used as a path to bridge the gaps between purchaser and supplier. It is important to have well developed negotiating strategy with tactics as a foundation to support that strategy. In cooperative negotiation, buyer-supplier negotiate creates win-win situation in order to decide the ways to divide and share the extended value pie.

Ramsay (2004) noted that negotiation process is crucial of managing differences in business relationships between buyers and suppliers in supply chains. Negotiation can be break down to two major approaches. One of the approaches is cooperative negotiation which emphasizes on win-win formula between both parties involve in negotiation process. This is genuine integrative bargaining whereby both parties assumes that all aspects of their interest been taken care well in order to maximize their cooperative value and benefit. Another approach of negotiation called competitive negotiation which is genuine distributive and adverse towards common understanding. This approach focus on individual interest whereby each party attempt to maximize the self gain through aggressive cost competition tactics, enforce time pressure, lack of flexibility and threatening lost of business in order to gain advantage against the other party.

As discussed by Janda and Seshadri (2001), cooperative negotiation cultivate win-win formula which able to increase supplier loyalty and improve supplier relations as all parties involved strongly believed, satisfied and agreed with mutual understanding and their common interest well protected.

It is important that both parties investigate the objective of the deal and things need to be achieved through the intended deal in order to create effective negotiation. Effective negotiation should be able to create confidence to supplier that long term business opportunity is possible for them to undertake any capital investment (Ashcroft, 2004). However, this required high level integrity on both sides which enable accurate exchange of confidential information.

There are two approaches to business negotiation, which include the distributive and the integrative approaches. The term “distributive negotiation” is used interchangeably with the terms “competitive”, “win-lose” or “transactional negotiation”, and the term “integrative negotiation” is used interchangeably with the terms “win-win”, “collaborative” or “relational negotiation” (Mavious et al. 2006). Within distributive negotiation, businesses will take the approach where negotiation is a competition between each other, with one party gaining and one party losing. In contrast, the integrative approach is not a competition between businesses, and both parties should be a “winner” as a result of this negotiation (Mavious et al. 2006). The distributive approach is characterised by the perception that the issues under negotiation are fixed, whereas the integrative approach is characterized by the perception that the issues under negotiation are not fixed (Mavious et al. 2006). The negotiation approach selected by businesses will assist them in dealing with trading partners. Either approach selected by the business will have an influence on the matters that may arise during the business negotiation, such as the development of trading relationships and the qualification of suppliers (Bichler et al. 2001).

Brett (2000) explained that a negotiation process is a form of social interaction by which two or more parties try to resolve perceived incompatible objectives. In addition, Bichler et al. (2003) explained that the negotiation process must consider all the rules that define the negotiation arena, which can include the agenda and the permissible decision-making and communication activities of the negotiators. This is referred to as a negotiation protocol (Bichler et al. 2003). Depending on the negotiation protocol, the negotiation structure can be divided into three levels: unstructured negotiation, semi-structured negotiation, and structured negotiation (Bichler et al. 2003):

1) Unstructured negotiation does not follow any protocol allowing for exchanges that do not conform to any rules (for instance, face-to-face negotiation);

2) Semi-structured negotiations follow certain rules but the protocol is not fully defined, allowing the participants to have some flexibility in their decision-making and information exchange activities (for instance, negotiations can be supported by a negotiation support system);

3) Structured negotiations follow a set of rules that fully define the parties’ decision-making and allowable activities (for instance, auctions). Most traditional negotiations are conducted face-to-face, while others are conducted using mail, fax and telephone (Bichler et al. 2003). Traditional negotiations are based on bilateral, multilateral or multi-bilateral negotiations over a single issue or group of issues, and they involve cooperation or competition amongst the negotiation agents (Bichler et al. 2003). Traditional negotiations are rarely completely structured, and they are comprised of negotiation situations in which haggling, bartering and tendering take place (Bichler et al. 2003). One of the most popular traditional negotiations is bilateral bargaining, which involves two parties who compete or cooperate in order to compromise on an issue. The following section discuss further on the patterns of negotiation in purchasing goods and services. Effective negotiation and communication able to foster good business relationship with supply chain partners.

2.2 Negotiation Strategy

David (2009) noted that the meaning of purchasing and purchasing is very similar, but people have moved to a different wording to identify a change in the organisation. A few years ago, it was known as purchasing, but, consciously changed to purchasing. One way of getting people’s attention to this was to change the name. But having done that, purchasing, by definition becomes the transactional piece and purchasing becomes the strategic piece. Supply chain management is a purchasing tool that was born out of necessity.

Demands for newer and more innovative goods and services, limits on resources, and the increasingly complex, interrelated nature of the global market place have each created pressure on public managers to optimize new and innovative process methodologies to meet purchasing needs (Korosec, 2003).

Supply chain management has strategically integrated the whole purchasing process, including the "identification, acquisition, access, positioning, and management of resources" in a series of carefully considered steps, in order to attain stated objectives (Duffy, 2002).Similarly, according to Smeltzer (2003), purchasing functions are not just the matter of price and delivery time, but they are aligned with the organization’s long term objectives. Furthermore, Smeltzer (2003) also argued that in order to complete firm’s strategic objectives, selecting the right suppliers to ensure their dependable and flexible supply is one of purchasing management objectives. Purchasing or better still, Purchasing (as sometimes used), is one of the basic functions common to all types of business enterprises.

The purchasing process is viewed as involving sourcing (planning: needs identification and assessment, supplier selection) contracting, monitoring and evaluation, and expediting; based on the model definition by (Van weel, 2002).

A model is suggested base on an organization conceptual approach to follow in strategizing the purchasing function in addressing the manufacturing performance. Supplier partnership and interaction, contract agreement, long term strategic factors correlate to core competences, bench marking, value chain analysis as well as cost issues been framework as fundamental for organization purchasing strategies. On of that, other factors are such as delivery reliability, supplier finance stability and cash position, cost capability, technical capability been essential in firms buy decision which been translated in strategic position. In the past yields will only focus on lowest cost position by neglecting the cost hidden factors mainly on quality and delivery. However, firms are now aware and awake that more information is required from suppliers before awarding the business.

In general, purchasing in manufacturing make available raw materials, spare parts for tools and factory maintenance as well as services for daily operation. Development of manufacturing sector recognized the importance for firms to engage effective purchasing strategies. Thus, in order to strive through the competitive and dynamic business environment, purchasing strategies that focusing on formulating favorable business deal with suppliers through identification and development of competitive sources for high quality as well as low cost raw materials and spare parts plus excellent services is essential for world class manufacturing firms. The present study employs four element of purchasing element which been initiated by Kiser (1976) and later transformed by Janda and Seshadri (2001). Kiser (1976) study offer six purchasing strategies such as negotiation, developing and maintaining good relations with suppliers, sourcing, developing suppliers, protecting the cost structure of company and minimizing cost (Janda & Seshadri, 2001, p. 294). The present research adapted Kiser’s model on purchasing strategies into four elements of purchasing strategies. Purchasing strategies in this study maintain effective negotiation and collaborative supplier relationships and interaction, while supply base management strategy subsumes the sourcing and developing suppliers in Kiser’s purchasing strategy. The effective cost management includes Kiser’s latter two strategies which is protecting the cost structure of company and minimizing cost. The study believed that the holistic integration of purchasing strategies proposed by Kiser need to be investigated towards the manufacturing performance especially in the context of Malaysia.

2.2.1 Effective Negotiation Strategy

Hazeldine (2009) quoted “If you want to success in business…you have to learn how to negotiate”. Firm needs to explore ways to compile resources in gaining bargaining power with supplier as driver to sustainable competitive advantage. According to Giunipero and Pearcy (2000), influencing and persuasion, understand business condition and customer focus are fundamental for negotiation process. Good business relationship with supply chain partners has been boost through effective negotiation and communication. Ramsay (2004) stressed that negotiation process is key in managing differences of business relationships between buyers and suppliers. There are two major approaches in negotiation. One of the approaches had known as cooperative negotiation which stress on win-win formula between both parties involve in negotiation process which believed to be value creating. Both parties in cooperative negotiation assumes that all aspects of their interest been taken care well in order to maximize their cooperative value and benefit (Ramsay, 2004; Dion & Banting, 1988). This leads to problem solving through trust and mutual understanding environment (Alexander, Schul & McCorkle, 1995). Another approach of negotiation called competitive negotiation which is genuine distributive and adverse towards common understanding. Emphasize given on individual interest whereby each party attempt to maximize self gain through aggressive cost competition tactics, enforce time pressure, lack of flexibility and threatening lost of business in order to gain advantage against the other party.

As examine by Janda and Seshadri (2001), cooperative negotiation cultivate win-win formula which able to increase supplier loyalty and improve supplier relations as all parties involved strongly believed, satisfied and agreed with mutual understanding and their common interest well protected. Covey (2009), a writer for The 7 Habits of Highly Effective People quoted “Win-win is a belief in the third alternative. It’s not your way or my way; it’s a better way, a higher way. Win-win is base on paradigm that there is plenty for everybody, that one person’s success is not achieved at the expense or exclusion of the success of others”. It is important that both parties understand the objective of the deal and things need to be achieved through the intended deal in order to create effective negotiation. Effective negotiation will create confidence to supplier that long term business opportunity is possible for them in order to undertake new capital investment (Ashcroft, 2004).

Negotiation is critical element to execute in purchasing strategies that an organization developed. Negotiation will be used to close the gaps between purchaser and supplier. Negotiating strategic with tactics need to be developed as a foundation to support purchasing deal. In cooperative negotiation, buyer-supplier negotiate creates win-win situation in order to decide the ways to divide and share the extended value pie (Monczka et al., 2004). In this situation effective negotiation from buyer’s point of view creates value when receiving better price than a competitor, assistance in developing new technology or product design, shorter lead time for ordering and delivering. In addition, both parties able work together to reduce waste and ultimately eliminate the hidden cost in long run. On the other hand, supplier creates value with additional volume, preferential and promising treatment for future business and lead to technical assistant from purchaser to reduce the operating cost. Eventually effective negotiation strategy should lead towards greater manufacturing competitive priorities.

2.2.2 Collaborative Relationship and Interaction Strategy

Building collaborative relationship and interaction with supplier is the key element in purchasing strategy. Mark (2004) referred supporting element of buyer-supplier collaboration as cultural element which made of trust, mutuality, information exchange, openness and communication. There was empirical study done by Golicic and Mentzer (2006) on examination of relationship magnitude in term of trust, commitment and dependence as independents variable contribute to relationship value. Relationship value had been acknowledged as first step of quantifying measurement of relationship outcome. Humphreys, Shiu and Chan (2001), added that collaborative relationships demand for trust and commitment for long term cooperation in addition to willingness to share risks. Commitment and trust been developed through effective communication (Lengnic-Hall, 1998).

Meanwhile, Chandra and Kumar (2001) claimed that trust, commitment and collaboration between buyer and supplier were becoming more popular in supply chain relationships because of their ability to reduce fraction and uncertainty. Commitment from both supplier and buyer been exercised through committing resources to the relationship which exist through the expense, time and amenities of an organization (Zailani & Rajagopal, 2005). The development of trust, respect and commitment are from openness and honesty (Whipple & Frankel, 2000). Therefore, successful and effective partnerships between buyer and supplier observed when committing their resources towards improvement. Buyer able to establish great network with supplier through collaborative relationship in order to achieve cost, quality, delivery and time improvements. Bilateral interaction is part of information sharing which open clear and broad lines of communication. Communication able to sort out valuable information on timely manner to avoid buyer from left out on progress surrounding them. Information sharing is essential in order for chain members to share and gather the information available surround them. Openness and honesty a part of first impression will be crucial step in creating trust among buyer supplier. Information sharing is not merely desirable but mandatory to build effective collaborative buyer supplier relationship.

2.2.3 Effective Cost Management Strategy

Janda and Seshadri (2001) noted that every single percentage saving in purchasing cost can significantly contribute in saving half point in sales. This significant contribution in purchasing function required focus on total cost management as part of purchasing strategy influencing manufacturing performance. Zsidisin and Ellram (2001) identified that total cost of ownership fundamental for strategic cost management. Their research examined cost management associate with supplier alliances in three dimensions covers total cost of ownership, understanding supplier cost and target costing.

Cost management revolution had switch focus from price to Total Cost of Ownership ensuring that purchasing strategies necessity to manufacturing operation. Total cost of ownership is essential for buyer in order to analysis and assess the cost factors involved in acquisition, possession, utilize and subsequently disposition of a product or services (Ellram & Siferd, 1998) which ultimately leads to firm’s make or buy decision (Zsidisin & Ellram, 2001). Ellram (1995) in his study highlighted that total cost ownership interrelated with supplier relationship as this involved information sharing on cost driver factors. This will be the initial point for buyer to identify the gaps that needs aligning in order to achieve the target cost which eventually will lead to minimize the production cost. Giunipero and Pearcy (2000) reported that purchasing function is shifting focus from tactical which stress on placing an order and price saving, to strategic move with more attention given on value added activities and total cost savings. Thus, as part of cost leadership strategy (Porter, 1980), manufacturing firm must aligning objectives with its core supplier in order to achieve significant cost reduction. Zsidisin and Ellram (2001) identified specific elements such as working out breakdowns of supplier cost structures and creates database on estimation of supplier cost structures base on market and economic environment study able to help buyer in better understanding and enhance knowledge on supplier costs. Understanding cost structure of key suppliers, supplier expertise and experience will help buyer to generate new ideas and identify high cost areas which need more attention.

Target costing development will be part of effective cost management strategy. Target costing been studied by Ellram (2000) through detail analysis on process step to achieve overall target costs and working on continuous cost improvement plan. Target cost is the point organization willing to spend on the purchase of product and services which ultimately determine the price that market willing to pay and backs out the desired profits (Zsidisin & Ellram, 2001). As a result, target costing will be focusing on firm’s product which it can produce and sell at reasonable profit supported with long term competitive advantage against the competitors’ price. First component in target costing is to understand competitive position of an organization in order to further boost the overall competitiveness. According to Ellram (2000) second component of strategic cost management will be focus on cost driver analysis. Cost drivers described as breakdown of cost element which used to explore cost reduction opportunity or process improvement. Third component in Ellram (2000) research on target costing is value chain analysis which influenced by involvement of other members of value chain. In term of engineering effort, value chain elaborates the important of design the right products at the right price during the pilot release of product.

2.2.4 Supply Base Management Strategy

One of the key elements in supply base management is determining the optimum number of supplier by purchasing for continuous improvement. Thus, organization must maintain right number of suppliers for effective management and continuous development of its supply base. Monczka et al., (2004) outline that supply base optimization will contribute in cost, quality, delivery and information sharing improvement between buyer and supplier. Supply base optimization will be a continuous process which identifies the best suppliers in terms of number and quality.

Krause has described the supplier development as “any effort by a buying firm to improve a supplier’s performance and / or capabilities to meet the buying firm’s short term and / or long term supply needs” (Krause, 1999, p. 206). It is required substantial effort from purchasing to warrant that supplier development plan been in place to increase supplier performance and capabilities (Humphreys, Li & Chan, 2004). Thus, size of supply base plays an important role in supplier development process. Dwyer, Schurr and Oh (1987) stressed that purchasing able to increase committed from supplier via long term orientation with single source supply. Trent and Monczka (1999) supported that large supply base will jeopardize the close interaction between buyer and supplier. Therefore, genuine partnership that an organization develops should be limited due to the factor of cost of development and maintenance (Zailani & Rajagopal, 2005). Supply base management strategy is essential in order to develop, improve and maintain its supplier’s performance and competencies to fulfill manufacturer short and long term supply requirement (Ndubisi, Jantan, Loo & Ayub, 2005). Vonderembse and Tracey (1999) research finding revealed the existence of significant relationship between supplier selection criteria and supplier involvement contributing towards manufacturing performance.

2.3 Manufacturing Performance

Leachman, Pegels, and Shin (2005), studies on manufacturing performance revealed that most of the researchers evaluating manufacturing performance are sharing common understanding that need to have multiple performance measurement. Looking back on the evaluation of performance measurement before 1980s, the performance measurement process was mainly concentrated with cost accounting approach which consists of financial key performance indexes such as return on investment (ROI), profit plus earning per share (Gomes, Yasin & Lisboa, 2006). However, focusing on the financial indicators alone been exposed to the critics that other non-financial indicator which contribute towards organization performance been neglected and will only lead to short term thinking.

Therefore, Gomes, et al., (2006) evaluate the revolutionary of the performance measurement approaches been used by researchers in their attempt to comprehensively measured the manufacturing performance aspects. Dsouza and Williams, (2000) stressed on application of problem specific approaches on their research the essential of processes and tasks flexibility measurement as an answer to address the market volatility and to fulfill the diverse customer needs. As the focal point of the performance measurement process, Performance Prism been established on the foundation of multi-dimensional framework by incorporating the stakeholders contribution and fulfilling their satisfaction level. As a result, the performance evaluation best described in term of attaining sustainable achievements without factoring for corresponding resources or efforts pledged which normally underestimate the true competitive status in the decision making unit. This is because that outcome of the results might fail to stress the relationship between “good operational practices and their economic benefits” (Leachman et al., 2005, p.855).

Manufacturing strategies consist of competitive priorities which mainly focus on quality, cost, delivery, flexibility, innovation and responsiveness. Competitive priorities been widely used as part of the measurement for manufacturing strategy performance (Zeng, Tam, & Wan, 2008) most firms used to achieve these objectives through engaging with advanced technologies and manufacturing practices such as worker empowerment, JIT and concurrent engineering (Snell & Dean, 1992). However, Das and Narasimhan (2000) reported that latest development in industry comes out with new dimension which divert the focus of manufacturing strategy towards supply chain capabilities to obtain quality, cost, delivery, innovation and responsiveness objectives. Zailani and Rajagopal (2005) also stressed the importance in measuring manufacturing performance through evaluating the key competitive priorities which consist of quality, delivery and flexibility. However, their measurement on performance focus only given on three elements and neglecting other competitive priorities element such as cost, innovation and customization responsiveness. Cost and new product introduction which directly relate towards the innovation and customization responsiveness, important in creating synergy in the manufacturing growth as this will eventually determine the sales of product produced.

Das and Narasimhan (2000) in their research cited Minahan (1997) study on success of supplier versatility that Pitney Bowes analyze a group of key suppliers with manufacturing expertise will be developed by manufacturing performance, future growth and new product introduction. Therefore, the competition in manufacturing industry might be within the radius of supply chain competence which consists of purchasing strategy. Vonderembse and Tracey (1999), measured the manufacturing performance in the aspect of quality, cost of production and rework, finish goods delivery and in addition consider the inventory level of work in production goods. In their study, they related supplier selection and involvement tactics impact and manufacturing performance. As a result, they highlighted that these progress in supply chain had provided opportunity to purchasing to become a significant influence in achieving manufacturing and business objectives.

2.4 Theoretical Framework

2.4.1 Agency Theory

This study is based on Agency theory. Agency theory attempts to describe the agency relationship, in which one party (the principal) delegates work to another party (the agent), who performs that work (Eisenhardt, 1989). Two problems can arise in such relationships, the desires and objectives of the principal and agent can conflict, and it is difficult for the principal to verify what the agent actually is doing. Principal–agent researchers are concerned with a general theory of the principalagent relationship, a theory that can be applied to employer-employee, buyer-supplier and other agency relationships. Agency theory is most relevant in situations in which contracting problems are difficult. These include situations in which there is a substantial objective conflict between principals and agents and sufficient outcome uncertainty to trigger the risk implications of the theory (Eisenhardt, 1989). Eisenhardt discusses the assumptions of the theory and raises the issue of principals learning about the agents when there is a long term relationship, when there may be less need for outcome-based contracts. This may be more the case with purchasing in the private sector, where there are fewer regulations than in the public sector, and where tendering is not required. Private businesses are free to have long term relationships with software developers and consulting firms. Jones (1995) suggests that long term relationships with vendors may in the long run lead to higher effectiveness, due to the stability of the relationship being dependent on controlling objective conflicts.

Sharma has extended the agency theory and focuses on the principal-professional relationship, where professionals can include consultants (Sharma, 1987) According to Sharma (1987), there are some specific distinctions of the principal-professional agency exchange. The greatest is the power asymmetry. In an owner-manager or manager-worker relationship, the principal have the power to design and enforce contracts and hence the power to enter or to dismiss incentives for the managers and the workers. In contrast, principal-professional exchanges are inherently those in which professionals have the power over lay principals by virtue of their expertise, functional indispensability, and intrinsic ambiguity associated with the services they provide. It also involves a considerable information asymmetry; the principal does not only not know how the professional agent does the job, but also not what he or she does. This information asymmetry also makes it difficult for the principals to know beforehand how much service is actually needed.