An analysis of the integration of strategic sourcing and negotiation planning.
To ensure the purchasing function is aligned with the organization's long-term goals, many organizations have transitioned from tactical buying to strategic sourcing. Tactical buying focuses on the basic transactions needed to acquire the organization's raw material and service requirements. Strategic sourcing is a systematic and comprehensive process of acquiring inputs as well as managing supplier relations in a manner that achieves value in obtaining the organization's long-term objectives. The literature indicates that negotiation should be an essential element in tactical buying as well as strategic sourcing; however, the extent to which negotiation planning and strategic sourcing practices are integrated is not known.
To understand the possible relationship between strategic sourcing and negotiation, the current definitions of strategic sourcing are first reviewed. This is followed by a discussion of the role of planning in negotiation. But first, the rudiments of business processes in relationship to strategic sourcing and negotiation are briefly reviewed to validate the fact that these are business processes.
A business process is:
The interaction of some combination of people, materials, equipment, method, measurement, and the environment to produce an outcome or an input to another process (Besterfield, Besterfield-Micha, Besterfield, and Besterfield-Sacre 2003).
Clearly, strategic sourcing and negotiation both fit the concept of process, given this perspective. However, the purchasing and negotiations literature does not generally consider sourcing and negotiation as a set of integrated processes. The strategic sourcing process and negotiation planning are generally considered separate processes.
Strategic Sourcing Definitions and Models
Several strategic sourcing definitions have been offered in the literature; interestingly, a commonality among definitions is an emphasis on the integration of business processes. For example, Andersen and Katz (1998) defined strategic sourcing as a set of interrelated business processes focusing on items and methodology associated with maximizing the value of externally procured goods and services. Carr and Smeltzer (1998) established the integrated nature of strategic purchasing by developing an empirical definition that emphasizes integration. Cart and Smeltzer (1999) expanded upon Andersen and Katz's (1998) definition of interrelated sourcing processes by formally defining strategic purchasing as an integrated process. Additionally, Stimpson (1998) also emphasized the importance of integrated processes in strategic sourcing.
Due to the complexity and number of interrelated tasks that compose the integrated process of strategic sourcing, multiple sourcing models have been proposed. Novack and Simco (1991), two of the earliest authors to propose a sourcing process, established a four-step model. Subsequently, many firms, both consulting and industrial, have developed sourcing models, each with a variety of antecedent and consequential steps or stages. For instance, Mercer Management Consulting has described a six-step process that encompasses the creation of an annual plan to managing supplier relationships (Andersen and Katz 1998). A.T. Kearney has a well-known seven-step process, which is initiated by profiling the sourcing group and continues indefinitely through benchmarking and improvement. A similar Deloitte Consulting model utilizes a seven-step process that begins with assessing opportunities and progresses to institutionalizing the strategy. Examples from industry include United Technologies Corporation (UTC) with a model containing nine steps, Capital One with seven steps, and the B2eMarkets model with a seven-step process. (1)
Though these models may contain differing numbers of steps, they have several concepts in common. All of the models place importance on negotiations within the process and include a negotiation or negotiation-planning step. It could be argued that the purpose of each strategic sourcing process is to ensure the development and implementation of a negotiated agreement that satisfies the long-term goals of the firm. if the process is viewed from this perspective, negotiation planning is the culmination of all the preceding steps in the strategic sourcing process.
A noteworthy point is that none of these models discuss the integration of negotiation as having a significant contribution. It seems to be either assumed or neglected that negotiation is integrated within the strategic sourcing process.
The Role of Negotiation Planning
Several studies conducted in the late 1990s indicated that negotiation is a critical aspect of purchasing and supply chain management and forecast that negotiation will remain a vital tool (Carter and Narasimhan 1997; Crowder 1998; Trent and Monczka 1998; Carter, Carter, Monczka, Slaight, and Swan 1998). The strategic sourcing process, especially market and cost/price analysis, can be viewed as the planning that leads to negotiation; as such, the processes are integrated.
The importance of planning as a prerequisite for successful negotiations cannot be overstated. To quote Lewicki, Saunders, and Minton (2000), "The dominant force for success in negotiation is the planning that takes place prior to the negotiation... the most important step for success in negotiation is how one gets ready for the game." Also, Baron (1998) reviewed the empirical evidence and substantiated the importance of the negotiation planning process on economic outcomes.
The most commonly cited steps in negotiation planning generally include: defining issues, assembling issues, defining the bargaining mix, defining interests, identifying limits, setting targets, analyzing the power base of both parties, and developing supporting arguments (Asherman and Asherman 1990; Burnstein 1995; Lewicki and Hiam 1998). Strategic sourcing processes are directly related to these negotiation planning processes. For instance, each of the strategic sourcing models emphasizes the importance of clearly defining the good or service to be negotiated. This is usually stated in terms of commodity or service category analysis. Setting goals consists of market analysis to establish benchmark prices. Total cost analysis includes determining the various points for negotiation, including where the cost reduction emphasis should be placed. Additionally, industry and market analyses are necessary to determine each party's power base.
Strategic sourcing has become a more common practice and it can be argued that negotiation effectiveness has contributed to sourcing success. However, only limited connection has been made in the literature between sourcing and negotiation. More specifically, Doctorff (1998) addressed negotiation reengineering and stated that it is important to integrate internal and external considerations. This may be broadly interpreted to imply that factors such as market forces should be integrated with the negotiation plan. Similarly, Ertel (1999) maintained that in order for negotiations to be considered a corporate capability, the process must consider a wide array of variables. Again, it can be inferred that when dealing with suppliers, considering the different steps involved in strategic sourcing is necessary.
A culmination of the prior literature suggests that strategic souring and negotiation are important supply management processes; however, the extent that the initial stages of strategic sourcing and negotiation are integrated is not known. If supply management professionals fail to use a strategic sourcing process, negotiation goals and strategies may be formed from an intuitive, poorly structured process that may lead to inappropriate negotiation outcomes (de Dreu, Carnevale, Emans, and van de Vliert 1994). The research reported here investigates the extent to which supply management professionals use strategic sourcing as the planning process for negotiation.
The literature review indicates that strategic sourcing and negotiation should be an integrated process but no research has examined the extent to which they are actually integrated. As a result, it is not known if supply management professionals use the strategic sourcing process to guide negotiation planning. To better understand the relationship between strategic sourcing and negotiation planning, the following primary research question and secondary questions were addressed:
Primary Research Question: Is the strategic sourcing process integrated with the negotiation plan for a specific good or service?
To determine if the negotiation plan is systematically integrated with the strategic sourcing process, the strategic sourcing process must first be defined, investigated, and evaluated. To investigate these issues, two secondary research questions are presented. The first question asks about the extent to which the strategic sourcing process is followed. The researchers propose that the more comprehensively and systematically the strategic sourcing process is followed, the more likely a thorough negotiation plan is created.
Secondary Question One: To what extent is the strategic sourcing process followed comprehensively and systematically prior to the negotiation plan?
The second question focuses on the negotiation plan. It is included to determine if the strategic sourcing process leads to the correct negotiation style. If the sourcing plan is comprehensive and thorough, it should direct the negotiation approach. However, if the sourcing results are ignored, an inappropriate negotiation style would be used.
Secondary Question Two: To what extent does the negotiation plan include the negotiation style directed by the sourcing process?
To answer the research questions, the researchers selected an exploratory case research method with a quasi-scientific sampling process.
As shown in the literature review, sparse prior research exists relating strategic sourcing and negotiation planning. Furthermore, both strategic sourcing and negotiation planning are processes that are difficult to clearly observe and measure in organizations. At this stage of development, theoretical constructs and operational measures would be premature. Therefore, the decision was made to pursue an exploratory, qualitative, case research approach following the recommendation of Denzin (1970).
Consistent with the recommendation of Yin (1981), the researchers first developed a research protocol. This protocol was based on the research questions and a review of both the negotiation planning process and the strategic sourcing process. The guidelines of Miles and Huberman (1984) were followed in developing the interview protocol. Different types of data were considered using the prescriptions of Felding and Felding (1986), Eisenhardt (1989), and Ellram (1996).
Validity and reliability deserve special attention in qualitative research. To quote Van Maanen (1982), "The relative stance assumed by the ethnographer raises, of course, a major intellectual issue." To overcome this issue, the researchers resolved to not have any preconceived conclusions during the case studies. In addition, Felding and Felding (1986) stated that both the reliability and validity lie in the qualification of the researcher. The researchers who collected and analyzed this data had developed qualitative research skills through specialized training and had extensive business experience.
The first step in the research protocol was to develop a description of the product or service in terms of supply risk and value to the organization. A framework presented by Monczka, Trent, and Handfield (2001) assisted in developing this aspect of the investigation. Second, the market for the good or service was described in terms of Porter's Five Forces Analysis (Porter 1980). Steps one and two allowed the researchers to identify and classify the nature of the product and its market to determine if the negotiation style was appropriate.
In accordance with secondary question two, the research protocol dictated analysis of the negotiation style. The interview questions for this portion of the research followed a framework developed by Lewicki et al. (2000) used to differentiate between integrative and distributive types of negotiation.
The next stage in the investigation monitored the extent to which the strategic sourcing process was followed. The process used for this study was drawn from the models presented in the literature review. It consisted of the following seven steps:
1. Categorize the buy
2. Market analysis
3. Supply strategy development
4. Total cost or price analysis
5. Bid development
6. Supplier selection
7. Negotiate agreement
Analysis of an integrative, dynamic business process is challenging. To ensure an accurate analysis, it was important to use the guidelines of Miller (1991) to collect multiple types of information and use triangulation. Key phrases and terms of the interviewees were used in combination with direct observation and analysis of key documents. In a number of cases, it was possible to analyze written negotiation plans or observe the actual negotiation session. Either the case study was conducted by two individuals or data was reviewed and discussed by a second party to ensure reliability and validity of the analysis.
Qualitative research experts recommend that case studies be continued until the researchers meet saturation (Yin 1981). In this study, it was concluded that saturation on the research questions had been reached; however, the study also revealed other research issues that should be addressed in future studies. These issues are presented in the discussion section.
The organizations needed to meet several criteria to be included in this study. First, the companies had to have a department or function dedicated to strategic sourcing with a documented strategic sourcing process. Second, the organizations had to be willing to comprehensively answer the research questions. Third, the organizations had to allow their data to be reported in aggregate with data from other companies. Finally, these organizations had to be viewed by industry executives and academicians as exemplars. The companies should be perceived as outstanding and in the forefront of the areas of strategic sourcing and negotiations. They were considered exemplars for one of the following reasons: a winner of Purchasing magazine's annual medal award; a special article written about the company's sourcing process or results in a major trade magazine; remits or description of its process as the focus of a major presentation at a sourcing conference; referred to by at least two executives from other companies as a strategic sourcing exemplar.
The organizations were largely Fortune 500 companies representing the aerospace, manufacturing, semiconductor, computer manufacturing, and other industries. Since the unit of analysis is the strategic sourcing process and negotiation plan for a specific good or service, multiple observations were allowed from the same organization. However, the researchers ensured that when more than one case was drawn from the same organization, the sourcing teams were from different divisions within the organization and the commodities were dissimilar.
Although the organizations had to meet these criteria, the sample was also one of convenience. Venkatraman and Ramanujam (1986) supported convenience samples when they stated that the method in which the constructs are analyzed may be more important than the sample, since all organizational research faces sample restrictions. Dess and Robinson (1984) also defended convenience sampling when they stated that ultimately all business research relies on convenience samples to one extent or another.
To answer the primary research question, the two secondary questions had to first be investigated and answered. The first secondary research question provides insights into how well the strategic sourcing team conducted each step in the strategic sourcing process. The other secondary question is designed to investigate the influence of the strategic sourcing process on the negotiation style. The following discussion covers both secondary questions, then uses the findings to answer the primary research question.
Secondary Question One
Secondary question one begins with an evaluation of the previously mentioned steps in the strategic sourcing process. Each step was individually investigated to determine how comprehensively it was conducted. The evaluation was conducted against various criteria described in each of the steps in the process. It is important to note that several tasks in the sourcing process are contingent upon previous tasks. Therefore, if the negotiation team incorrectly or incompletely finished the prior task, the subsequent tasks were often judged to be incorrect or incomplete due to the lack of necessary knowledge available in the preceding step. For purposes of this research, the negotiation plan is considered the final step in the strategic sourcing process.
The reader may find it useful to refer to Figure 1 during the following discussion; the horizontal axis lists each case and the vertical axis lists the seven steps in the sourcing and negotiation process. Shaded blocks show the processes that were either incomplete or performed incorrectly.
[FIGURE 1 OMITTED]
Step One: Categorize the Buy. The first step in the previously outlined strategic sourcing process, "categorize the buy," ensures that the sourcing process is aligned with the companies' strategic goals so the supply strategy meets the correct criteria. To evaluate how well each negotiation team completed step one, the researchers asked questions designed to elicit where the interviewees believed the purchase should be placed in the Segmentation and Relationship Quadrant (Steele and Court 1996). The researchers asked further questions designed to gain greater knowledge of the purchase and to test the thoroughness of the team's categorization. Using this information, the researchers plotted the purchase (see Figure 2).
[FIGURE 2 OMITTED]
In the 29 cases, three companies overemphasized the importance of the purchase to the organization; as shown in Figure 1, this corresponds to cases 11, 16, and 17. This led the sourcing teams to inflate the importance of the relationship with the prospective supplier. Inflation of the suppliers' importance by the purchaser can shift the power in the negotiation from the buyer to the seller. The three cases in which the researchers and the negotiation team disagreed are shown in bold. The arrows in the figure point to the Segmentation and Relationship Quadrant that the researchers interpreted as the correct categorization.
Step Two: Market Analysis. A market analysis is conducted to determine the location of power within the buyer-supplier negotiations. For this research, the markets were defined as either buyer-centric or seller-centric. A buyer-centric market existed when there was an abundance of sellers, excess capacity, or one buyer had a large amount of spend relative to the average supplier's revenues. A supplier-centric market existed when there was an abundance of buyers, a shortage of capacity, a small average buyer-spend relative to average suppliers' revenues, or one supplier possessed specialized, proprietary technology.
The researchers asked how and to what degree negotiation teams determined the number and nature of capable suppliers in the market. The market analysis was considered complete when the interviewees expressed confidence that either all or a sufficient number of suppliers had been identified. This included all relevant global suppliers.
This investigation found seven instances where the purchasing firm failed to consider another source other than the current supplier. As shown in Figure 1, this corresponds to cases 9, 11, 12, 16, 17, 21, and 22. Although not shown in Figure 1 or included in the tally, the researchers believed an additional four sourcing teams did not comprehensively evaluate all possible relationship power imbalances.
Step Three: Supply Strategy. The third step of the strategic sourcing process involves the development of a supply strategy. To meet the criteria for completion of this step, the sourcing team had to determine whether the item should be single- or multi-sourced, if spend consolidation was a viable tactic, and how much importance to place on the relationship. The sourcing relationship was operationally defined on a continuum from arm's length to alliances.
Of the 29 cases in this study, seven teams failed to comprehensively complete this step in the strategic sourcing process. As shown in Figure 1, this corresponds to cases 9, 11, 12, 16, 17, 21, and 22. To determine the completeness and thoroughness of this task, the researchers asked questions designed to elicit how the future of the supplier-buyer relationship impacted the current purchase decision. The researchers plotted the negotiation teams' perception of the relationship on the common risk/uniqueness versus value/profit potential chart as shown in Figure 3. Again, discrepancies are in bold and arrows represent the researchers' proposed quadrant. The seven cases where errors occurred corresponded exactly with errors in the previous step. In all but one of the cases, the team erred on the side of developing a strategic relationship rather than negotiating a one-time buy or relieving a bottleneck purchase.
[FIGURE 3 OMITTED]
Step Four: Total Cost or Price Analysis. This step in the strategic sourcing process consists of a cost or price comparison of the supplier's goods or services based on the supply strategy's requirements. The type of analysis necessary for each purchase is based on the nature of the buy. If the item is a commodity that has little strategic value to the firm, a simple price comparison is considered sufficient. But if the purchased item is a complex, unique, or strategic item, then a total cost of ownership should be undertaken. The general framework of Ellram (1995) was used in those situations where price analysis could not adequately represent the intricacies of the purchases; as such, a total cost model was considered the best method.
Of the 29 negotiations observed, 11 sourcing teams failed to conduct comprehensive cost or price analyses. As shown in Figure 1, this corresponds to cases 3, 9, 10, 11, 12, 16, 17, 21, 22, 26, and 29. A few of the teams developed complex and impressive total cost models, but these cases were the exception. The majority of teams relied on price to differentiate products where cost analysis would have been more appropriate.
Step Five: Bid Development. After conducting a thorough cost/price analysis, the sourcing team should request bids from the firms that met the requirements of the previous steps. All but two firms in this study completed a request for quotation (RFQ) or proposal (RFP) to ascertain the seller's prices and terms. Even in cases where the company was in a single-source situation, the development of an RFQ or RFP and its response from the potential seller was an integral part of the company's strategic sourcing process.
Firms often used preexisting RFQs and RFPs without modifications designed to fully describe the complexities and uniqueness of the purchase. Although only two of 29 teams did not issue an RFQ or RFP, 12 teams issued standard RFPs or RFQs with little or no modification. Although not considered an error, the strategic sourcing process could have benefited from an individualized RFP or RFQ.
Step Six: Supplier Selection. Based on the responses to the RFQs and RFPs, the sourcing team should conduct additional cost/price analysis and/or supplier analysis to narrow the supplier pool to a smaller, more select group of competing suppliers. The result of the supplier selection process is a short list of highly viable suppliers. The sourcing team should then develop individual negotiating plans for each of the members of this "short list." In this study, four of the 29 negotiation teams failed to conduct comprehensive supplier selection based on any established or communicated criteria. As shown in Figure 1, this corresponds to cases 3, 9, 21, and 22.
Step Seven: Development of a Negotiation Plan. The negotiation plan was considered complete and comprehensive if it (1) established a price range as a result of the market analysis that was derived from the bid development and cost analysis stages of the strategic sourcing process, and (2) contained a best alternative to a negotiated agreement (BATNA). The BATNA should have been developed based on the results of the supplier selection stage. Of the 29 cases, 15 failed to meet both criteria 1 and 2. As shown in Figure 1, this corresponds to cases 3, 5, 9, 10, 12, 13, 15, 16, 17, 20, 21, 22, 24, 26, and 28. Therefore, only 14 sourcing teams developed a comprehensive and complete negotiation plan.
Based on the seven-step strategic sourcing process, analysis of the cases shows that only 14 of the 29 sourcing teams comprehensively and systematically followed the seven-step strategic sourcing process. Seven teams did not complete at least one step in the process and eight teams did not complete two or more steps. The results are summarized in Figure 1.
Secondary Question Two
To answer secondary question two, the researchers divided the sample into either integrative or distributive negotiation styles based on the style descriptions provided by Lewicki et al. (2000). Distributive negotiation is comparable to an arm's-length or win-lose approach while integrative negotiation is considered a collaborative or win-win negotiation. The integrative style was used in 20 of the 29 cases. The distributive style was used in seven cases, while in two cases it was not possible to accurately determine the negotiation style.
The appropriate negotiation style was determined from the market analysis and supply strategy. Using the purchasing representative's perception of the market, the researchers compared the chosen negotiation style with the market conditions and supply strategy. It was not possible to determine the appropriate style based on the supply strategy and market analysis in four of the 29 cases. The appropriate match existed in 16 of the 25 remaining cases. In eight of the inappropriate matches, an integrative style was used when a distributive style would have been appropriate, in one case, the firm's plan was to form a strategic alliance but it planned on using a strongly distributive negotiation style.
Primary Research Question
The findings for the primary research question emerge from the secondary questions. The integrative nature of the process was reviewed when addressing secondary question one. The strategic sourcing process was integrated with the negotiation plan in 14 of the 29 cases or approximately half of the cases.
One primary and two secondary research questions were addressed. The following conclusions are based on interviews and document reviews of 29 cases.
Primary Research Question One. Is the strategic sourcing process integrated with the negotiation plan for a specific good or service?
To answer this question, the first six steps in the strategic sourcing process must be completed and then integrated with the negotiation plan. In these 29 cases, 18 displayed an integrated process in the first six steps. In 12 of the 18 cases, the negotiation plan was integrated with the first six steps. Accordingly, in 66 percent of the cases in which the first six steps were completed, the negotiation plan was also integrated into the process, in 40 percent of all the cases investigated, the entire process was integrated.
The answer to this research question may be stated another way. The companies all espoused a strategic sourcing process and were considered exemplars. However, only 40 percent of the cases demonstrated strategic sourcing as truly exemplary. Furthermore, in general, the negotiation plan was not well integrated with the other strategic sourcing steps.
These percentages are supported by the general qualitative responses and interpretations. For instance, when asked about market analysis as a foundation for commodity pricing, a manager responded, "We generally have a pretty good feel for what's happening, so no formal analysis is required." Another response was "When you have been doing this as long as I have, you don't need all the groundwork that young people do." And still another response was "We generally don't have the time for a drawn-out procedure." The most telling comment was "We use strategic sourcing to establish our negotiation position in certain situations, but it generally isn't worth it" (the time).
Secondary Question One: To what extent is the strategic sourcing process comprehensively and systematically followed prior to the negotiation plan?
The answer to this question was addressed in the previous response to the primary research question. In over 60 percent of the cases, the process was systematic prior to the negotiation planning process. The conclusion is that the strategic sourcing process was not as comprehensively and systematically followed as it should be for negotiation planning.
Secondary Question Two: To what extent does the negotiation plan include the negotiation style directed by the sourcing process?
The appropriate style was used in approximately 64 percent of the cases, or 16 of the 25 cases in which the style could be assessed. In one case, a distributive style was used when an integrative style would have been appropriate. But in all other cases, an integrative style was used when a distributive style would have been appropriate. The integrative style was displayed by such comments as "This company always takes the win-win approach" and "As a company we believe in collaboration; long-term relationships can only be achieved through an approach that stresses mutual benefit." The conclusion is that although the correct negotiation style was used in the majority of instances, the incorrect style was still applied in a substantial number of cases. Themes demonstrated by the above quotes indicate that in many cases supply management professionals did not use the sourcing process to determine the correct negotiation style; instead, they relied on corporate culture and expectations to maintain a close relationship.
Much is said about the fact that strategic sourcing and negotiation are important business processes. But sourcing and negotiation planning were not seen as one integrated process in the majority of these cases. As a result, this study raises several important issues and questions about the integration of strategic sourcing and negotiation. It appears that even the exemplars, those companies thought to be "the best of the best" at strategic sourcing and negotiations, generally lack the understanding that strategic sourcing is an integrative process.
An important finding is that only 14 negotiation plans included a best alternative to a negotiated agreement and two of these were based on incomplete strategic sourcing processes. A priori establishment of an alternative to a negotiated agreement with the other party is at the core of negotiation power (Lewicki et al. 2000). This indicates that the sourcing process and the negotiation plan were not well integrated in a majority of instances. Furthermore, developing the negotiation plan is generally considered the most crucial step in negotiation. In the majority of the cases analyzed, the negotiation plan was not
well planned. It is possible that the teams did not comprehend the importance of this step or did not know how to effectively integrate the previous steps with the negotiation plan to create an integrated process.
Poor planning and the lack of process integration are often demonstrated by the selection of negotiation styles. In a number of the cases studied, the market analysis indicated that the sourcing team had a dominant market position, suggesting a distributive negotiation; however, the sourcing teams often chose to use an integrative approach treating suppliers as market equals.
Why was the market analysis not integrated with the negotiation-planning phase of the strategic sourcing? Key words, phrases, and trends drawn from the interviewees indicated that the sourcing team emphasized supplier collegiality even if it was contrary to strategic sourcing outcomes. The following phrases reinforced this finding: "This company always uses a win-win approach" and "Relationships are more important than the immediate outcome" or "This company continually stresses the team approach with suppliers." These phrases indicated that the organizations' supply management cultures pushed the negotiation team toward a certain negotiating style regardless of the outcome of the strategic sourcing process. This conclusion is similar to the argument presented by Laseter (1998). He stated that a company maintains a proclivity for a certain negotiation style and does not balance the approach. The research reported here indicates that in some cases the sourcing team ignored the results of its own efforts and used an approach consistent with its organizational culture.
Another possible explanation for the overuse of strategic alliances and integrative negotiations is that some firms have a misunderstanding of strategic sourcing. These firms believe that strategic sourcing is synonymous with alliances and integrative negotiation. For instance, one respondent said, "Isn't strategic sourcing just a way to establish alliances?" Although this individual had attended a company course on strategic sourcing, he apparently did not understand or was not taught the nature of the process.
Mental frames are an integral process in negotiation. A mental frame means that an individual enters the negotiation with a mental set for the appropriate process and goals without considering relevant information (Bazerman 1998). One company's supply manager said, "A good negotiator 'knows how to get a price reduction without a lot of number crunching." Although this was one of the most biased quotes, similar comments indicate that in many cases the team's definition and implementation of strategic sourcing is not reinforcing the value of the negotiation plan as a part of an integrated sourcing process. It appeared that many sourcing professionals' mental frameworks contained strong links between strategic alliance and strategic sourcing. Further, research indicated this relationship existed regardless of the relative buyer-supplier power or the item being purchased. In several cases, it appeared that sourcing professionals did not see a connection between strategic sourcing and negotiation planning.
Tradition or organizational norms could be highly related to the previous explanation. In several cases, the interviewees responded that they had conducted supplier negotiations for many years and that they conducted these negotiations prior to the introduction of strategic sourcing. In these cases, it appeared that strategic sourcing existed in name only. It appears Cox (1996) was correct in his comment that firms are becoming too quick to adopt the latest innovation before investigating and understanding it completely and learning how to properly implement it.
Additionally, in several cases the company rated the purchase importance too high. in each case, no formal system existed for determining the value of the buy. Unfortunately, inflation of the value of the buy could easily lead a buyer to pursue a strategic alliance based on a heightened sense of the purchase's importance to the company.
A number of potential managerial implications emerge from this study that may require differing levels of process reengineering. The most important implication is that supply managers should emphasize process integration. A strategic sourcing process in name only will not lead a sourcing team to the optimum negotiation plan for a given buy. The team must understand the importance of all the steps to fully integrate the results from sourcing steps into the negotiation plan.
Another implication relates to the fact that in many situations the negotiators did not thoroughly investigate their initial position or BATNA. The negotiation literature makes a strong argument about the importance of the initial position and having an alternative in order to strengthen the position. It is important that supply managers be educated to understand the importance of links between strategic sourcing and the development of this initial position.
From the cases studied, three progressive practices were identified to help overcome the strategic sourcing implementation shortcomings. The first practice is one that two firms used to guarantee that team members followed the required strategic sourcing protocol. The firms maintained a negotiating "shared service" team that was required to report on each step of the process. The firm would not conduct the negotiation if the team failed to adequately follow the strategic sourcing process. Furthermore, the shared service team could report to the team's upper management that it was removing itself from the process, if the process was not being comprehensively or systematically followed. This created a strong incentive for the team to follow the process completely and thoroughly.
A second progressive practice involved the use of written job aids. These aids acted as gates at the end of each step of the strategic sourcing process. The team's director would then authorize the team to progress to the next task in the sourcing process. This ensured that the process was thoroughly and comprehensively completed. For instance, if appropriate, the negotiator would show the director the three-year trend of the PPI for that purchase and indicate how this affected the range of prices used in the negotiation plan.
A third progressive practice is the use of Web-based worksheets. These worksheets had to be completed and approved by the director of supply management prior to entering into negotiations for purchases greater than $500,000. Each step of the worksheet involved an aspect of the strategic sourcing process. When completed, the worksheet represented the team's negotiation plan. Each of these practices was considered valuable because it helped to integrate processes and ingrained strategic sourcing in the firm's corporate culture.
This research is exploratory and raises valuable direction for future research with an enhanced framework. This framework could use the commodity strategy and negotiation strategy as the independent variables. However, a problem with studying any integrated business process is that it is difficult to gain intimate firsthand knowledge of the phenomenon. A possible methodological remedy to better comprehend the strategic sourcing phenomenon would involve researcher participant observation in a small number of cases. Even though several negotiation sessions were observed for this study, it would have been ideal for a researcher to be involved in the entire strategic sourcing process. Unfortunately, this would require an extensive time commitment and probably preclude a large sample size. In a participant-observer research setting, it may also be possible to identify underlying process constructs and related hypotheses. This study may lay the groundwork for research that would be more generalizable, including a cross-industry survey.
A large cross-industry survey would be helpful in answering a number of questions that have been derived from this preliminary work. However, in order to conduct such a survey, several variables would have to be adequately developed. The commodity strategy and negotiation plan or strategy would first need to be clearly identified and would serve as the independent variable. Then the respondents could be asked how they determined the strategies. For instance, to what extent was a market analysis used to determine the strategy? How did the sourcing professional analyze the supply base and what type of supplier information determined the ultimate commodity strategy and negotiation strategy? The dependent variables would be the factors that created the commodity or negotiation strategy and a regression analysis would be used to test the relationship among the variables.
Several other variables should be studied concurrently. First, supply managers' understanding of strategic sourcing should be determined. At this time, the entire area of supply management uses a mixed set of process definitions. A clarification of practitioners' definition of strategic sourcing should be helpful Second, the relationship between organizational culture and the strategic sourcing process deserves special attention. It would be valuable to understand the different stages of sourcing implementation and how it is either impeded or enhanced by various characteristics of organizational culture.
A third analysis should determine if or when strategic sourcing is appropriate. For instance, when many qualified suppliers are available, strategic sourcing may not be necessary. But in the opposite situation when only a single source is available, strategic sourcing may or may not be appropriate. In what other situations would strategic sourcing possibly not be the appropriate model?
Another important research question is how the use of electronic sourcing platforms, such as reverse auctions, affects the integration of the strategic sourcing steps and the negotiation plan. Since many of these electronic tools aid in identifying suppliers, creating RFQs and RFPs, and finally setting prices, they should have a major effect on the practice and implementation of strategic sourcing.
Any business process is a complex phenomenon that is difficult to study. Surprisingly little is known about strategic sourcing as an integrated business process. The analysis reported here provides an initial insight into the relationship between strategic sourcing and negotiation. The results indicate that the majority of firms in this study did not thoroughly integrate the processes. This study also shows that from both research and practitioner perspectives, the understanding of progressive supply chain management practices may be lacking. Both academia and management need to conduct further research, as well as a more thorough implementation, of these practices.
Figure 1 STRATEGIC SOURCING STEPS COMPLETED IN EACH NEGOTIATION Negotiation Number Strategic Sourcing Process Steps 1 2 3 4 5 6 7 8 9 10 11 12 Categorize the Buy Market Analysis Supply Strategy Development Total Cost/Price Analysis Bid Development Supplier Selection Development of Negotiation Plan Negotiation Number Strategic Sourcing Process Steps 13 14 15 16 17 18 19 20 21 22 Categorize the Buy Market Analysis Supply Strategy Development Total Cost/Price Analysis Bid Development Supplier Selection Development of Negotiation Plan Negotiation Number Strategic Sourcing Process Steps 23 24 25 26 27 28 29 Totals Categorize the Buy 3 Market Analysis 7 Supply Strategy 7 Development Total Cost/Price 11 Analysis Bid Development 2 Supplier Selection 4 Development of 15 Negotiation Plan Shaded areas indicate that the step was not thorough or complete
(1) Information about these models was obtained by direct conversations with the organizations. Additional information about the models may be obtained from the first author.
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Larry R. Smeltzer is professor of supply chain management at Arizona State University in Tempe, Arizona.
Jennifer A. Manship is a Ph.D. candidate at Arizona State University in Tempe, Arizona.
Christian L. Rossetti is a Ph.D. candidate at Arizona State University in Tempe, Arizona
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|Author:||Smeltzer, Larry R.; Manship, Jennifer A.; Rossetti, Christian L.|
|Publication:||Journal of Supply Chain Management|
|Date:||Sep 22, 2003|
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