Case

Negotiation and its Complexities: Asian Journal of Management Cases

14(2) 88–93
A Case Study of Public Sector © 2017 Lahore University of
Management Sciences
Negotiation with Vendors SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0972820117712328
http://ajc.sagepub.com

S. Riasudeen1
Cyril R. Fernandez2

Abstract
This case is about the negotiation process carried out by the chief procurement officer (CPO) of a
leading public sector unit in India. When the company receives an order, the order is materialized
by using electric equipment in large quantity. Due to changes in the business situation, the company
realizes that it may not be possible to purchase the equipment that they require at the same price
as before. The company has two vendors from whom they buy this equipment. Both the vendors have
similar manufacturing policies and same raw material suppliers. Additionally, both the vendors have
gone through some management level changes. The CPO who is responsible for the purchase of the
electric equipment has to conclude the deal with the vendors and obtain the best possible price which
is closest to the amount they had previously paid the vendors.

Keywords
Manufacturing option, procurement policy, target price, negotiation process

Discussion Questions

1. Considering the limitations of both in-house manufacturing and outsourcing, what would be your
decision?
2. If you were the CPO, which of the options will you choose and why?
3. What kind of negotiation skill should the CPO apply for effective closure of the negotiation
process?

1
Department of Management Studies, Pondicherry Central University, Pondicherry, India.
2
General Manager, Materials Management, Bharat Heavy Electricals Limited, Boiler Auxiliaries Plant, Ranipet, Tamil Nadu, India.
Note: In India, a Public Sector Undertaking (PSU) is a government-owned corporation. These companies are owned by the Union Government
of India, or one of the many state or territorial governments, or both.

Corresponding author:
S. Riasudeen, Assistant Professor, Department of Management Studies, Pondicherry Central University, Pondicherry, India.
E-mail: riasudeen1966@gmail.com
Riasudeen and Fernandez 89

4. How will you identify which of the suppliers would be ready to supply at a price quoted by the
company? How will you make them agree for the same?
5. Trace the negotiation timeline and apply the MGA model to dissect the approaches and pinpoint
each move that would fit into the MGA framework and justify your stand.

Aabid, the Chief Procurement Officer (CPO) of NMD Limited, a leading Public Sector Undertaking
(PSU), in Navi Mumbai, was confused. NMD Limited, which had recently received an order for Electro
Static Precipitator, was in requirement of a transformer which formed the central component of the
order. The Chief Executive Officer (CEO) had insisted that the transformer be procured. Aabid had
earlier purchased the transformer from one of NMD’s two vendors, Syskateck Industries and Tyco
Technocorp, at a ‘dream price’. Aabid was unsure of being able to procure it again at the same price.
He was expecting the price to have gone up by a minimum of 40 per cent. However, Aabid observed
that the management at both Syskateck and Tyco had undergone changes in the recent past and therefore
saw an opportunity to seal the procurement of the transformer at the lowest possible price. He invited
suggestions from his team members to minimize the procurement price of the transformer.

Profile of NMD Limited

NMD Limited was an integrated power plant equipment manufacturer and one of the largest engineering
and manufacturing companies of its kind in India, engaged in designing, engineering, manufacturing,
constructing, testing, commissioning and servicing of a wide range of products and services. NMD catered
to the core sectors of the economy, namely the power transmission industry, the transportation sector
(railways), renewable energy, the oil & gas industry, and the defence sector, with over 180 product offerings
to meet the needs of these sectors. The establishment of NMD Limited in 1964 brought about an upsurge in
India’s heavy electrical equipment industry. Consistent performance in a highly competitive environment
enabled NMD Limited to attain the coveted Maharatna status in 2013. Only companies with an investment
ceiling ranging from `10,000 million to `50,000 million were awarded this prize.
The high-quality standards and reliability of NMD’s products and systems were an outcome of its strict
adherence to international standards, through acquiring and adapting some of the best technologies from
leading OEM companies in the world, coupled with indigenous technologies developed in their in-house
R&D centres. Most of the manufacturing units and other entities of NMD had obtained accreditation from
Quality Management Systems (ISO9001:2008), Environmental Management Systems (ISO14001:2004)
and Occupational Health & Safety Management Systems (OHSAS18001:2007).

Case Background
NMD had bagged an order for 250 electro static precipitators by quoting aggressively, as the engineering
sector was down in the dumps. The transformer, being the heart of the recently obtained order, formed a
good percentage of the total value. NMD had procured a similar component in the previous year from one
of its two suppliers. NMD had an in-house manufacturing capability for the above discussed component.
Information about its manufacturing option and procurement policy is shared below.
90 Asian Journal of Management Cases 14(2)

Manufacturing Option
In one of the divisions of NMD, spare capacity to manufacture the transformer was available. Sourcing
the component from within would have led to capacity utilization at NMD. This was considered to be
essential by the corporate management since the company was passing through a lean phase with a
dearth of orders especially in the division where the transformer could be manufactured and assembled.
Although the technology available within the company was slightly outdated, it could still manufac-
ture marketable products. While the item was made up of two discrete components that were hard-wired
externally, there were suppliers in the market who could supply an integrated version (with the two
components merged into one product). The high internal cost of manufacture, combined with its old
design, led to a towering price of `1.04 million per piece.

Procurement Policy
The procurement policies of NMD were limited as it happened to be a PSU. The company had a written
document indicating unified purchasing policy which was followed across various divisions of the
company. This procurement policy had its own advantages and disadvantages, both of which have been
mentioned below.
The major disadvantages were:

1. Procurement of materials could be through tender system only.

2. Orders could be placed only with the bidder who was ranked the lowest (L1) in the tender.
3. Negotiations, if any, could only be an exception.
4. Negotiations could be conducted only with the L1 supplier.

The third and fourth limitations were as per the guidelines issued by the Central Vigilance Commission
(CVC) of India to which all PSUs were subjected.
The major advantages of this policy were:

1. Each division of the company had a well-organized database of suppliers (with records of the
supplier performance measured and recorded for each order executed).
2. Purchase enquiries could be limited to the suppliers in the approved material directory of the
division.
3. Provision was also available for the company to resort to buying through Reverse Auction (RA),
which was considered to be a transparent mechanism for conducting negotiations (electroni-
cally), with all the participants in a tender enquiry.

Vendor Details
The company’s vendor base essentially had only two strong contenders, Syskatech Industries and Tyco
Technocorp. Both these firms had their products built on the same design philosophy.
Riasudeen and Fernandez 91

Supplier of Vendors
One key and major ingredient of the equipment was a special type of oil, which was supplied by only one
supplier in the world located in the USA. Therefore, the price element of the equipment with respect to
this major item which they had to import was at par since the US based supplier had uniform worldwide
pricing for all its customers. The other major raw materials that went into the equipment were copper
windings and sheet metal steel. While the price of the copper fluctuated highly, the price of steel had
been stable over the past one year. Thus, the overall price of the inputs remained constant for both firms
(Syskatech and Tyco Technocorp).

Manufacturing Process of Vendors

The manufacturing processes adopted by both parties (Syskatech and Tyco Technocorp) were similar and
therefore the costing structure for both remained quite similar. The annual (financial) turnover of both
these competitors (Syskatech and Tyco Technocorp) was also comparable. However, both the parties
competed fiercely in the market to secure the available orders for themselves.

Past Procurement
In the year 2013–2014, NMD resorted to buying about `392 million worth of transformers.
The procurement was made through the RA process. There was stiff competition in the RA. The RA
yielded NMD a saving of about `31.63 million. The average unit price obtained then was `400 thousand.
This was what Aabid termed as the ‘dream-price’. The RA produced about 30 ‘hits’ with both suppliers
vying with each other for taking the order.
The market condition was such that both contenders were starving for orders and an order of
`392 million would form a major portion of their order book. Syskatech, one of the contending firms,
had a turnover of `531 million in the last year, of which `392 million was from the single order that they
had bagged from NMD.
Although Aabid was very happy at the price he got during the previous year, he was apprehensive
about the quoted price, feeling that Syskatech might end up making a loss in executing the order and
therefore he personally and carefully monitored the progress of the supplies which stretched throughout
the year. The supplies were slow, but nevertheless it did not affect the operations at NMD. To some
extent, in the course of the year, Aabid found the supplies were received on a start-stop-start manner, as
Syskatech made a ‘lot’ of supply and waited for the release of payment by NMD before taking up the
manufacture of the subsequent lot. Syskatech was unable to mobilize the necessary working capital for
maintaining an uninterrupted flow of supply to NMD. At one point, Aabid had to intervene by talking to
a funding agency to extend monetary support (credit) to Syskatech based on the strength of the order
placed. The contracted payment term between NMD and Syskatech was 45 days of credit from the date
of receipt of the goods.
92 Asian Journal of Management Cases 14(2)

Current Situation
While preparing the quote for the new orders, the Chief Marketing Manager (CMM) of NMD,
Mr Chowdary, had a discussion with Aabid as to what price the marketing department should
factor in for the transformer. It was Chowdary who shared the data of internal costs of in-house
manufacture with Aabid. Chowdary also informed Aabid that, in consideration of the high cost of in-
house manufacturing, he had taken a special dispensation from the Divisional CEO to outsource the
manufacture of the transformer by buying the item through the purchasing department.
As Aabid felt that the previous price was a one-time ‘dream’ price, he informed Chowdary that the
next price would be about +40.5 per cent on the previous price, which Aabid noted, would still have
been about 50 per cent lower than the in-house manufacturing price. Chowdary did not agree with
Aabid about the raise in the price and insisted that he could only take the current price in his esti-
mates. Since Aabid and Chowdary were not in agreement, Aabid privately approached the CEO.
To his dismay, the CEO also insisted that NMD had to acquire the orders somehow. The CEO took
sides with Chowdary and overruled Aabid’s objections. However, the CEO conceded to the fact that
Chowdary would not take into consideration the previous price in his estimates but would escalate it
by 20 per cent. Aabid was unhappy, but he could not do anything in the face of the insistence of the
CEO who went to the extent of saying that Chowdary should be a part of the team and that he was
paid to contain the material costs which alone could increase the competitiveness of the company in
the market and also led to the profitability of NMD. Knowing it to be a difficult task, as a matter of
caution, Aabid had a separate discussion with the Engineering Manager to contain the cost. The
Engineering Manager assured Aabid that he would concentrate on reducing the material content
(steel) while making the detailed design, so that the anticipated price increase of the transformer
could be off-set with lesser steel material input for the overall system.
With this verbal assurance from the Engineering Manager, Aabid shared his thoughts with his team
and instructed them to keep the price increase to a minimum. He also assured his team that he would
be a part of every step of the purchasing process.
In the team meeting Aabid recalled that the Chief Operating Officer (COO) of Syskatech had been
replaced. The COO was eased out of the company on account of the loss-making order that he had
booked with NMD during the previous year. At that point in time, the order book of Syskatech was
very lean and the action was taken by the COO with the intention to augment the top-line. However,
the management was not pleased with the loss booked by the COO of Syskatech and therefore had
asked the COO to leave.
Aabid had a gut-feeling that Syskatech would have booked a loss of around 15 per cent during the
previous order and shared the same with his team. During discussions, Aabid had a hunch that the
management at Tyco Technocorp would also have undergone changes, since both the suppliers were
aggressively competing in the market.

Supplier Current Status

Aabid shared his hunch with Mr Roberto, the Senior Buyer at NMD. Roberto revealed that Tyco
Technocorp did not only replace its COO but also the Regional Representative (RR) of its firm.
Roberto informed that the replacement had been effected two years back at the top and six months
back at the region level as a fall-out of a loss-making order booked by the COO in a government
contract. With such management changes at Syskatech and Tyco, NMD’s buying team felt that the
Riasudeen and Fernandez 93

current COOs would be cautious and circumspect in quoting their prices for the fresh requirement of the
company.

Options with CPO

Aabid invited ideas from his team members for the best approach that should be adopted for the present
purchase so that the company could get the material at the optimum price.
He said that the options available were:

1. Insist with Syskatech to take a repeat order at the same rate, terms, and conditions.
2. Proceed with tendering and the adoption of the RA process.
3. Go ahead with tendering on paper-mode bidding with the first lowest price taking the order and
follow it up with face-to-face negotiations, if required.
4. Place an order with Tyco Technocorp on nomination basis subject to their acceptance to supply
the material at the current price levels.

In this scenario, Aabid wanted the team to adopt the buying process which would allow NMD to get the
best price.

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