OPS 395 Week 4 Negotiation and Contracts Example

Index Plus What? Planning the Negotiation and Contract for a Three-Year Stainless Steel Supply Agreement

[Student Name]

University of Phoenix

OPS/395: Purchasing and Procurement

Week 4 Assignment

[Instructor Name]

[Date]

Fox Valley Washer Works, the mill, prices and terms are composites written for a model paper.

Week 3 selected Mill A as Fox Valley Washer Works' primary stainless steel supplier, at about 70 percent of a $21 million category, with Service Center C as secondary. The made-up Wisconsin company now needs to negotiate a three-year agreement. The metal portion of the price will move with market surcharges, so the negotiation concerns the base and processing charge above that index, along with capacity, quality, delivery and terms. This paper sets out the plan and the contract it produced.

Objectives and Priorities

The category manager, Alicia Brandt, ranked Fox Valley's objectives:

Must have: a processing adder above the index no higher than $0.14 a pound; guaranteed capacity of 1,000 tons a month in March through May; thickness tolerance at the tighter level achieved in sample trials; mill test certificates with every coil.

Should have: delivery within three weeks; payment terms of net 45; quarterly review of the adder against market conditions.

Nice to have: consignment stock of the two most-used gauges at Fox Valley's plant; joint work on recycled-content reporting.

Interests on Both Sides

Positions are what each side asks for; interests are why. Fisher et al. (2011) argued that negotiators reach better agreements by focusing on interests rather than positions, inventing options for mutual gain and using objective criteria. Fox Valley's interests are predictable cost, reliable supply in the spring peak and consistent quality on its press line. The mill's interests, learned from the sales director and public reports, are filling capacity during a soft market for stainless, steady volume to plan production, prompt payment and a reference customer in commercial equipment.

Alternatives and the Bargaining Range

Fox Valley's best alternative is to shift more volume to Service Center C, whose bid implied an adder of about $0.15 a pound, plus slightly higher freight. That sets Fox Valley's walk-away near $0.15. The mill's alternative is to sell the tonnage elsewhere; with its mills running below capacity, its lowest acceptable adder is estimated at about $0.11, based on its bid range and published market commentary. The bargaining range is therefore roughly $0.11 to $0.15. Each cent a pound on about 5,200 tons a year is worth about $104,000 a year, so the range matters.

Strategy and Plan

Because the mill will be a long-term primary supplier, Brandt chose a collaborative approach with firm limits. Zachariassen (2008) studied negotiation in supply chain relationships and found that negotiators used different strategies depending on the relationship's importance and context, with more integrative approaches where parties expected to work together over time. Brandt's plan was to open with a package rather than a single price: a three-year term and 70 percent of volume in exchange for an adder of $0.12, guaranteed spring capacity and the tighter tolerance. Planned trades included offering net 30 instead of net 45 in return for a lower adder, and offering a longer term for consignment stock. Thompson (1990), reviewing negotiation research, noted that negotiators often fail to see opportunities to trade across issues they value differently; the package approach was designed to find those trades.

A cent a pound sounds small until it is multiplied by ten million pounds.

The Meeting

The sales director countered at $0.14 and resisted the capacity guarantee, citing scheduling constraints. Brandt shared Fox Valley's spring forecast and offered to place spring orders six weeks earlier, which addressed the mill's scheduling concern. The mill agreed to guaranteed capacity in exchange for the early orders. On price, the two sides settled at $0.125 with net 30 payment terms, worth about $0.005 a pound to the mill in faster cash. Consignment stock was deferred to the first annual review. Throughout, Brandt avoided misrepresenting the secondary bid, describing it only as competitive.

Preparing the Team

Brandt did not negotiate alone. A quality engineer attended to explain the tolerance requirement with sample data, and the plant scheduler joined by phone to discuss spring capacity. Before the meeting, the three agreed on who would speak to each issue, which concessions Brandt alone could make and a signal for calling a short break. They rehearsed the mill's likely objections, including a claim that the tighter tolerance would require a premium, and prepared the sample data showing that the mill had already met it in trials.

Contract Summary

Pricing: published index surcharge for each month plus a fixed adder of $0.125 a pound for year one; the adder may be reviewed each quarter if a published market price measure moves more than 10 percent.

Volume: Fox Valley commits to 70 percent of its stainless needs, plus or minus 15 percent, with a 12-month rolling forecast updated monthly.

Capacity: guaranteed 1,000 tons a month from March through May if spring orders are placed six weeks ahead.

Quality: thickness tolerance and finish as specified in the sample trials; mill test certificates with each coil; nonconforming material replaced at the mill's cost, including freight.

Delivery: three weeks from order; on-time performance measured on the quarterly scorecard, with a corrective action plan required below 95 percent.

Payment: net 30.

Force majeure: performance excused for events beyond either party's control, with prompt notice and a right for Fox Valley to buy elsewhere during the event.

Term and termination: three years, with termination for repeated material breach after a 60-day cure period.

Dispute resolution: escalation to executives, then mediation before litigation.

Why Contracts and Relationships Both Matter

Lumineau and Henderson (2012) studied buyer-supplier disputes and found that contracts and past relational experience both influenced whether parties approached disputes cooperatively or competitively. A clear contract does not replace the relationship; it gives both sides a reference point when problems arise. The quarterly review meeting from Week 3 keeps the relationship active between disputes.

Conclusion

Fox Valley prepared by ranking objectives, understanding both sides' interests and estimating each side's alternative, which defined a bargaining range of about $0.11 to $0.15 on the processing adder. A collaborative package approach traded earlier spring orders for guaranteed capacity and faster payment for a lower adder, reaching $0.125. The contract records those trades in clear clauses on pricing, volume, capacity, quality, delivery, force majeure and disputes, setting up the supplier relationship and risk management covered in Week 5.

References

Fisher, R., Ury, W., & Patton, B. (2011). Getting to yes: Negotiating agreement without giving in (3rd ed.). Penguin.

Lumineau, F., & Henderson, J. E. (2012). The influence of relational experience and contractual governance on the negotiation strategy in buyer-supplier disputes. Journal of Operations Management, 30(5), 382-395. https://doi.org/10.1016/j.jom.2012.03.005

Thompson, L. (1990). Negotiation behavior and outcomes: Empirical evidence and theoretical issues. Psychological Bulletin, 108(3), 515-532. https://doi.org/10.1037/0033-2909.108.3.515

Zachariassen, F. (2008). Negotiation strategies in supply chain management. International Journal of Physical Distribution & Logistics Management, 38(10), 764-781. https://doi.org/10.1108/09600030810926484