Procurement Roleplay Negotiation
Speedy Confidential Information
Contract Procurement Manager
The newest electric car company, Speedy, has decided to implement an entire new lighting system that allows for brighter lights, with a longer range, that are less distracting and blinding to other cars. The selected supplier will be contracted to design the system based on Speedy’s requirements laid out in a specifications document.
A Request for Proposal was sent out to eight potential suppliers. For this project, Speedy will own the requirements but the supplier will own the detailed design.
After the eight initial proposals were received and evaluated, four suppliers were down selected and presented to the engineering and procurement teams. After presentations, the decision-making team at Speedy decided that Electro-Lite’s proposal met the technical requirements and offered competitive pricing, and as a result was the optimal choice.
You are the Speedy Contracts Procurement Manager responsible for negotiating this agreement and will be meeting with the Electro-Lite SVP of Sales shortly to go over their proposal.
Electro-Lite Proposal
Dear Speedy Decision-Making Team,
Electro-Lite is thrilled to present the following proposal for external lights for Speedy’s new electric car line:
| Description | Units | Total Cost | Cost Per Unit |
|---|---|---|---|
| Full Headlight Systems | 10,000 | $2,000,000 | $200 |
| Early-Trial Headlight Systems | 100 | $500,000 | $5,000 |
| Total Cost | $2,050,000 | ||
**Five-year fixed term, same units each year.
Electro-Lite accepts Speedy’s Terms and Conditions with the following exceptions:
Warranty
The Warranty Period for a product manufacture is forty-eight (48) thirty-six (36) months from Delivery to Speedy or sixty (60) months from Delivery to Speedy dealership.
Payment Terms
Unless specified in another written agreement between the two Parties, payment shall be (net) ninety (90) days thirty days (30).
Payments made by credit card are subject to a 3.3% 2.2% fee.
Unit Pricing is subject to escalation using the U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index on an annual basis.
Liability
Each party’s liability arising out of, or connected with this agreement, shall be limited to $500,000 two times the fees paid under this agreement.
Property
Electro-Lite shall not use Speedy’s name, trademarks, or service marks in any advertising, publicity, press release, or other promotional endeavor, including any customer lists, website or other materials distributed to Electo-Lite customers, without Speedy’s written consent.
Electro-Lite shall have the right to use Speedy’s name or logo on customer lists on Speedy’s website, if there are at least four (4) other clients’ names or logos, and no other information about the relationship is publicly shared.
After down selecting to four potential partners, you received the following quotes:
| Company | A | B | C | D |
|---|---|---|---|---|
| Full Headlight Systems | $225 | $200 | $275 | $210 |
| Early-Trial Headlight Systems | $5500 | $5000 | $3000 | $7500 |
| Vendor Rating (#/10) | 6 | 8 | 7 | 5 |
As a result, your team has selected Company B, Speedy, as the partner of choice. Speedy is offering both the best pricing and has the highest vendor rating based on various factors including how long they have been in business, their reputation, the quality of their products, etc.
Speedy is the clear favorite and you are tasked with getting the best deal possible as quickly as possible. Based on your meetings with leadership, these are your interests ranked in order:
The contract must be fully executed in 5 days. There is significant from the leadership to have a demo car available at the upcoming Detroit Car Show, and to do that, time is of the essence. Lighting is one of the few areas that has not been ironed out and you certainly do not want to be the person that held up Speedy ER to be held up.
Net 90 is the standard with nearly every other supplier you have. In order to do anything less you need go through a length internal approval process and you simply do not have the time to do that and get this agreement done in 5 days. That process has taken as long as four weeks recently because your legal and finance teams are so strained.
Price escalation is an issue. Your head of procurement is pushing everyone to sign flat pricing now as a strategy to reach their organizations three-year cost cutting goals. Generally, your team has the sense that this is one of the easiest gains because the other side may not value future dollars as much as your team.
$200 per Full Headlight Unit was the best quote you received of the four finalists, but you generally have had great success asking for better pricing one more time before awarding a contract. Your team calculated the “should cost” price is $190, which is the precedent you would use to negotiate the rate down.
The Early-Trial Headlight Systems are surprisingly expensive from all vendors, and you’d like to better understand why. At the end of the day, your biggest concern with regard to cost is total cost so you are not too worried about the these since there are only 100 units, but, of course, if you can negotiate a better price, that would be great.
Since this is new lighting technology, your legal team asked you to get as much liability protection as possible. You don’t need 2x the total cost of the project, but you would like to increase it from $500,000. As your leader asked you, “What happens if these lights do blind other drivers and accidents occur?”
Your organization’s market research has led your product team to believe that the warranty on exterior lights is not very important. While you would prefer the 48 months in your original proposal language, 36 is acceptable, if needed.
Speedy’s general policy is to not allow partners to use your name, logo, or trademarks; however, your engineering team is very impressed with Electro-Lite’s products and the company as a whole and has not only said this policy could be waived, they are proactively pushing your marketing team to develop a co-marketing campaign. You have approval to accept their changes.
Electro-Lite Confidential Information
SVP of Sales
The newest electric car company, Speedy, approached you to participate in an RFP to make exterior lights for their new line- Speedy ER. You have been working for years on a new system that is bright, longer range, yet less distracting and blinding to other cars – exactly what Speedy is looking for. From the moment you received the specifications you were very confident. Speedy was very evasive about how many companies started the process but eventually slipped and shared they were down to four vendors and asking for final proposals using their standard contract language and a simple pricing format. You did that with the information below:
Electro-Lite Proposal
Dear Speedy Decision-Making Team,
Electro-Lite is thrilled to present the following proposal for external lights for Speedy’s new electric car line:
| Description | Units | Total Cost | Cost Per Unit |
|---|---|---|---|
| Full Headlight Systems | 10,000 | $2,000,000 | $200 |
| Early-Trial Headlight Systems | 100 | $500,000 | $5,000 |
| Total Cost | $2,050,000 | ||
**Five-year fixed term, same units each year.
Electro-Lite accepts Speedy’s Terms and Conditions with the following exceptions:
Warranty
The Warranty Period for a product manufacture is forty-eight (48) thirty-six (36) months from Delivery to Speedy or sixty (60) months from Delivery to Speedy dealership.
Payment Terms
Unless specified in another written agreement between the two Parties, payment shall be (net) ninety (90) days thirty days (30).
Payments made by credit card are subject to a 3.3% 2.2% fee.
Unit Pricing is subject to escalation using the U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index on an annual basis.
Liability
Each party’s liability arising out of, or connected with this agreement, shall be limited to $500,000 two times the fees paid under this agreement.
Property
Electro-Lite shall not use Speedy’s name, trademarks, or service marks in any advertising, publicity, press release, or other promotional endeavor, including any customer lists, website or other materials distributed to Electo-Lite customers, without Speedy’s written consent.
Electro-Lite shall have the right to use Speedy’s name or logo on customer lists on Speedy’s website, if there are at least four (4) other clients’ names or logos, and no other information about the relationship is publicly shared.
You know the market well and are confident that you can provide very competitive pricing. You also know that what Speedy is looking for is exactly what you offer – and you have a very strong brand in the industry as well. All of these factors have you coming in with a desire to get a deal done, but doing so from a place of strength.
This would be a big contract for you and the company so you cannot be overly aggressive but, you also are growing very quickly so you are more than willing to walk away from the deal if the terms are not acceptable.
You met with your executive board before the meeting and are coming in prepared with the following priorities, in order:
Liability is absolutely critical to your legal team. Under no circumstance can you be liable for more than $500,000. That is an absolute deal breaker. Not only do they not want more exposure, they also want to be very careful with the precedent that on every deal. $500,000 is the highest you have on any deal and it’s the highest they would be willing to accept.
In that same vein, it is very important for your team that you shorten the warranty from 48 to 36 months. This is essentially another are of exposure for you and if every agreement had this it would impede your growth so legal has also said there is little to no flexibility from the change they recommended.
Your team feels that price escalation is linked with pricing. Your team sees it as total dollars for the life of the deal. You expect costs of good increases to be approximately 3% for the life of the deal. So, you either need to get that or your rates need to go up to $205 per unit. To be clear, you need to either keep the price escalation language as is, change it to 3% increases, or increase the cost per unit to $205.
The Early-Trial Headlight Systems are a hassle and quite expensive to manufacture. That said, since it’s a much smaller number of units, you would be willing to go down to $4,500 per, if that helped you protect other more important terms.
Net 90 is not ideal but you do not have cash flow problems so you’re willing to live with it if needed. You mainly added that change to give yourself some room to negotiate on other aspects of the deal.
You want the rights to use their logo because it can only help you get more business. It’s a nice to have at this point because you have enough other logos and reputation that one more won’t make a huge difference. But, that’s been the default language you’ve used on other contracts so it would be nice to keep it consistent.
Your president is a very successful negotiator. He has provided you with a few notes and you plan to follow them closely.
From a timing standpoint, he shared that there is no hurry on this deal. Don’t purposely delay, but the goal is to get this done in the next few weeks to keep momentum. He finds that having that genuine slower pace forces the other side to generate some urgency, and they pay for it on terms.
First, he has suggested that you start the conversation with a “assumed” close to put the other side under some pressure. In a soft but confident way, start with something like:
So, you got my proposal. We are excited to start and ready to sign.
Then, continue to put some pressure on them by asking early a bunch of questions:
The request for 48 months of warranty was higher than we have ever seen… where did that come from?
Net 90 is ambitious. How important is that to you?
Are we the only company that has been down selected at this point?
Finally, assuming you aren’t getting everything you want, consider using a statement such as:
Some people at my company feel we should have walked away from this deal already, are you really asking for more concession?
After this, you are on your own, but can and should refer to the priority list you created with your executive team. Good luck.
