L4M5 Commercial Negotiation Question and Answers

Bargaining is the negotiation stage where tradeables are typically introduced and discussed. During this phase, both parties exchange offers and concessions, using tradeables such as lead times and order quantities to find a mutually acceptable agreement. This aligns with CIPS's guidance on the stages of negotiation.

Building rapport sets apositive tonefor the negotiation and encourages openness. It is particularly vital during theopening phase, where first impressions are formed, and trust begins to build. Trust facilitates moreconstructive dialogue, enhances collaboration, and helps parties exploremutual interests.

“Developing rapport at the start of negotiations helps to foster trust and cooperation. This enhances the likelihood of reaching agreements that are mutually beneficial.”

(L4M5 Commercial Negotiation, 2nd edition, Section 3.4 - The Opening Phase and Relationship Building)

A BATNA provides the buyer with the confidence to walk away if terms are not favorable, ensuring they don’t settle for a suboptimal agreement. Knowing the best alternative enables buyers to negotiate from a position of strength, as per CIPS’s guidance on negotiation strategies.

Consultation involves actively involving stakeholders or counterparties in decision-making. By seeking input, it fosters a sense of ownership, increasing commitment to negotiated outcomes. It is particularly effective when the negotiator has low positional power, as it shifts dynamics from authority to collaboration. Unlike coercion or compliance tactics, consultation builds engagement and long-term trust, which is critical in complex procurement where buy-in is essential for contract success. CIPS stresses its role in building influence where direct authority is limited.

Under the European Union public procurement directives, all public sector bodies must abide by certain rules when they procure goods and services over a threshold value. These rules are codified under 5 procurement procedures:

1. Open Procedure

2. Restricted Procedure

3. Competitive Dialogue

4. Competitive Procedure with Negotiation

5. Innovation Partnerships.

Under normal circumstances, there is no commercial negotiation allowed under the two most commonly used procedure, Open and Restricted. Under these procedures, the prices and terms and conditions of contract should be decided via reference only to the tenderers' responses to the buyer's requests for tenders, and not through 'post-tender negotiation'. Under the other procedure, negotiation within the rules is permitted. Interested learners can read more about these procedures here.

LO 1, AC 1.1

Partnership relationshipsare strategic and long-term. They emphasizetrust, collaboration, and information sharing. Unlike transactional relationships, they go beyond price and delivery to focus on joint value creation.

“Collaborative partnerships involve open information sharing and mutual support. These relationships are built on joint objectives, trust, and commitment to long-term success.”

(L4M5 Commercial Negotiation, 2nd edition, Section 1.2 - Types of Supplier Relationships)

Activity-based costing is an alternative approach to traditional absorption costing. The characteristics of these two methods are illustrated in the graph below:

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Both organisational and personal power have the ability to influence the outcomes of negotiation. Good negotiators recognises the different sources of relative personal power they possess in a negotiation. There is no one superior source of personal power; they will vary in their effectiveness based on the situation. The more personal sources available the better, even if some not used, these can be used as a fallback.

LO 1, AC 1.3

Contextual (environmental) power includes home-ground advantage, control of the venue, access to colleagues and data, and comfort with logistics—all of which can tilt confidence and leverage toward the host (the buyer).

Contribution = Price - Variable cost

Break-even point (volume) = Fixed cost/Contribution

Principled negotiation is based on four fundamentals: people, interest, options and criteria:

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1st Principle: separate the people from the problem: Negotiator should depersonalise the situation and accepting that the subject matter of the negotiation. This can be difficult for untrained negotiators, but this is a key skill to develop

2nd principle: focus on interests, not positions: It is important in principled negotiations not to focus on their parties' positions (what are expressed during negotiations), but on the interests (underlying needs) behind them

3rd principle: invent options for mutual gains: this principle aims to help the parties find a solution that both would benefit from. The more options - or tradeables - that can be brought to the table the better.

4th principle: insist on using objective criteria: is about making sure that the negotiation stays focused on outcomes based on objective criteria and that it is productive.

LO 1, AC 1.2

Expert power is based on a person's high levels of skill and knowledge, formal training, qualifications and experience in a particular procurement category would give someone expert status and mean that in negotiation their voice is listened to as a more objective, informed knowledge leader. Expert power is based on facts, knowledge, research, insight and study.

Legitimate power comes from rules, formal authority, organisation rank, staff rate or official position held.

Reward power comes from one person's ability to compensate or reward another for compliance.

Referent power stems from their personality, way of engaging with others and habit of acting in a way that is in line with a strong set of values and principles.

Integrative negotiationfocuses onmutual gainand long-term collaboration. It seeks tomaximize joint outcomesand encourages parties to align interests andpursue shared goals. This contrasts with distributive tactics that prioritize individual wins and short-term gains.

“Integrative negotiations aim to create outcomes where both parties benefit. Shared problem-solving, information exchange, and joint goal pursuit are central features of this approach.”

(L4M5 Commercial Negotiation, 2nd edition, Section 1.1 - Principles of Integrative Negotiation)

Risk management (3) and the stage in the product life cycle (4) are internal factors within the supplier's control and directly influence pricing decisions. These internal factors guide strategicpricing policies. In contrast, price elasticity of demand and environmental legislation are external factors, as per CIPS’s guidelines on pricing influences.

Afixed price agreementprovides the buyer withcost predictability. Once the price is agreed upon, the buyer is insulated from any cost increases on the supplier's side. The supplier bears the risk of fluctuating input prices, which simplifies cost control and contract administration for the buyer.

“With a fixed price arrangement, the buyer is protected from future price increases and does not need to monitor the supplier’s ongoing costs. This is particularly useful for budgeting and forecasting.”

(L4M5 Commercial Negotiation, 2nd edition, Section 2.1 - Fixed Price Agreements)

Effective listeners demonstrate empathy and use paraphrasing to confirm understanding. These skills help build rapport, validate the speaker, and ensure accurate interpretation. Persuading and immediate solutions are active interventions, not listening behaviours. CIPS emphasises active listening as central to persuasion and relationship building in negotiation, enabling buyers to uncover underlying interests and respond appropriately.

In MIL planning, “Musts” are non-negotiable requirements (policy, law, mandatory standards). Ethical/sustainable procurement is typically a policy/legislative compliance requirement, so it belongs in Must; “Intend/Like” cover important and desirable aims respectively.

Listening is a hugely important skill in the world of work. It’s a key part of effective communication [...].

Regarding active listening, there is a model called 'The SIER Hierarchy of Active Listening'. It details four key stages required for effective listening. As with all models associated with active listening, its purpose is to help the listener be a better, more effective listener who really hears what is being said, connects with the individual with whom they are communicating and builds effective relationships.

The model is a hierarchical model meaning that each stage builds on the stage before it. While the model is sometimes used for training in the sales arena, it is helpful in all walks of life. The stages of the model are: Sensing (including hearing and watching body language), Interpreting, Evaluating and Responding.

Ray Carter coined the mnemonic STOPS WASTE to remind buyers of 10 cost-reduction ideas they can ask for themselves and their suppliers in any situation when considering a key purchase input. Stop Waste by:

Standardisation - is there a standard specification?

Transportation - is the inbound transport classification appropriate

Over-engineered - is the specification too tight?

Packaging - can packaging be reduced or eliminated?

Substitutes - is there a cheaper substitute material

Weight - is there opportunity to reduce weight of the product?

Any unnecessary processing - is there any unnecessary design or feature?

Supplier’s input - are suppliers able to assist with the cost reduction

To make - is it more economical to make or buy?

Eliminate - if no one uses the feature, can it be eliminated?

SAMOA is a useful acronym for checking and testing the information gathered from the Internet:

Source

Audience

Methodology

Objectivity

Accuracy

OWN-IT is acronym for 5 steps in the process of collecting and analysing the data and information needed in any field:

Outline

Wide search

Narrow search

Increase your stockpile of information

Transform your stockpile into new knowledge

A SMART goal is used to help guide goal setting. SMART is an acronym that stands for Specific, Measurable, Achievable, Realistic, and Time-bound.

The question asks about negotiation techniques which are not present in the book. In this question, there are only 3 recognised techniques:

- Framing and reframing: A frame is an assumption, or set of assumptions, that guides our attention and behavior. Reframing is the ability to identify and significantly change assumptions or perspectives. Framing has a significant impact on the effectiveness of negotiation outcomes and negotiator working relationships. You can read more on framing and reframing here.

- Anchoring: Anchoring bias is well-known cognitive bias in negotiation and in other contexts. The anchoring bias describes the common tendency to give too much weight to the first number put forth in a discussion and then inadequately adjust from that starting point, or the “anchor.” We even fixate on anchors when we know they are irrelevant to the discussion at hand. You can read more on anchoring here.

- Pacing and leading: Pacing and leading is a two-step lever of persuasion. First – You “match your pace” to the person you want to influence in as many ways as possible. You can do this by mimicking the way the person talks, stands, their appearance, etc. You can also mimic less tangible aspects like the way they act, or their emotional state. Second – Once you’ve set your pace with someone, lead them to whatever decision or behavior you want them to take! You can read more on pacing and leading here.

The relationship spectrum categorizes supplier relationships based on factors like strategic importance, allowing organizations to tailor their approach to each supplier relationship. CIPS emphasizes the relationship spectrum as a valuable tool for assessing and managing supplier interactions based on strategic relevance.

In order to identify opportunities where you can increase your leverage with supplier, you need to understand your spend. Undertaking spend analysis of your accounts payable (AP) data is an essential first step here.

Closed questions (requiring yes/no or factual answers) are best for verifying facts, ensuring clarity and accuracy. Open questions are useful for exploration, while hypothetical test possibilities, and leading steer responses. In negotiation, closed questions confirm details such as prices, quantities, or deadlines, preventing ambiguity in agreements. CIPS stresses using the full range of question types strategically, with closed questions essential in finalising commitments.

Absorption costing allocates indirect overheads to units, which is inherently judgemental; selecting allocation bases that “fairly” load overhead to products is the well-known difficulty. (By contrast, option B describes activity-based costing concepts—cost pools and drivers.)

Distributive approach to negotiation used when the interested parties are attempting to divide something up or distribute something of value, also known as zero-sum approach or win-lose. Win-lose approach is useful when the relationship with the other party (TOP) is short-term and once-off.

The question mentions 4 types of relationship:

Adversarial: Both seek to maximize position at the expense of the other. Almost no trust, communication and cooperation. These suppliers will probably provide non-core products or services with the buyer purchasing them on a one-off basis.

Outsourcing relationship: Use competent suppliers to manage non-core businesses previously done in-house. Require high level of trust and collaboration

Partnership: Both work closely on long term development by sharing information, technology and ideas.High level of trust with the aim to benefit both parties (win-win)

Strategic alliance: Both parties identify areas where they could collaborate to create mutual benefits

Among these 4 types of relationship, only adversarial is once-off. Then it is the correct answer.

Monopolies exist in many markets in real life for very different reasons:

Ownership of a Key Resource: When one company exerts sole control over a resource that is necessary for the production of a specific product, the market may become a monopoly. For example, the only medication deemed acceptable to treat a disease comes from a particular ingredient X, and knowledge of this ingredient X is owned by a single family owned company. The company can, therefore, be said to have a monopoly over ingredient X that is needed to cure the disease because it is the only company that can produce a product deemed acceptable.

Government Franchise: In certain instances, a monopoly may be explicitly created by the government if it grants a single company, whether private or government-owned, the right to conduct business in a particular market. For example, when a national railways transportation service is created by the government, in most cases they are granted a monopoly on the operation of passenger trains in the country. As a result, other firms are only able to offer passenger train services with the cooperation and/or permission of the government-owned provider.

Intellectual Property Protection: Extending intellectual property protection to a company in the form of patents and copyrights is yet another way in which monopolies are created. When a government does this, it is in fact giving a single company an exclusive right to provide a particular product / service to the market. Patents and copyrights work in providing owners of intellectual property with the right to act as an exclusive provider of a new product for a specific length of time. This creates a temporary monopoly in the market with regards to new products and services.

Natural Monopoly: A market may also become a monopoly simply because it may be more cost-effective for one company to serve the whole market than to have several smaller firms in competition with one another. A company with virtually unlimited economies of scale is referred to as a natural monopoly. Such firms become monopolies due to their position and size, which makes it impossible for new entrants in the market to compete price-wise. Natural monopolies are common in industries with high fixed costs and low marginal costs of operation such as providers of television, telephone, and internet services.

In this question, 'A single firm is very large' is not enough to tell whether this market is monopolistic.

The typical stages of commercial negotiation are Preparing, opening, bargaining, agreement, and closure. This sequence facilitates a structured approach where negotiators prepare strategies, initiate discussions, engage in bargaining, reach agreements, and formally close the negotiation. This structure is emphasized in CIPS materials as essential for achieving a balanced negotiation process.

Fixed-price agreements give buyers financial certainty, reducing exposure to supplier inefficiencies, cost increases, or inflation. The supplier bears the risk of cost overruns. While it doesn’t automatically improve quality or payment terms, it allows buyers to forecast budgets and manage risk effectively. This makes fixed-price contracts especially useful for projects with defined scopes, where costs are predictable. In contrast, cost-plus contracts keep the risk with the buyer and require constant monitoring of supplier costs, making them less attractive in terms of risk management.

Avoiding is unassertive and uncooperative. When avoiding, an individual does not immediately pursue his or her own concerns or those of the other person. He or she does not address the conflict. Avoiding might take the form of diplomatically sidestepping an issue, postponing an issue until a better time, or simply withdrawing from a threatening situation.

LO 1, AC 1.1

From a principled point of view, the focus of negotiation is on resolving the issue and not on winning temporary advantage over TOP through exploiting home advantage. From the principled point of view, the location and room layout should not be viewed as a source of tactical advantage and should not be used to try to gain advantage over TOP or unfairly influence them in the meeting room.

From a pragmatic point of view, not all of these elements in the ideal negotiation environment may be feasible, so the host may have to make compromises and explain these to TOP.

From a distributive point of view, the host will seek to create an advantage for themselves either explicitly or more subtly. It is arguable that any advantage gained through intentionally creating an uncomfortable environment to put short-term pressure on TOP is likely to be short-lived as TOP will likely reflect on this later and seek means to get even.

LO 2, AC 2.4

According to Thomas-Kilmann conflict model instrument, there are 5 conflict management styles:

In this scenario, the buyer's bargaining power is stronger than suppliers', and the relationship is transactional. Therefore, to get the most preferable outcome, the procurement professional can take an assertive approach, while he doesn't need to co-operate closely with these suppliers. Competing will be the most appropriate approach to negotiation in this scenario so that the buying organisation can get a better deal.

Fixed price contract is the contract in which the price is static throughout the contract period. A fixed-price contract may give certainty to budget and simplify contract management. However, it may lead to other problems since it requires bidders to estimate and bear the financial risks associated with price escalations. If the estimates are too high or events do not materialize, the buyer will pay a steep price that may affect the economy and efficiency of the contract. In the worst case, it may mean that the bid price is then above budget and may lead to a reduction in the requirements or rebidding. If the estimates are too low, it may appear as an abnormally low bid and disrupt contract execution.

On the other hand, price adjustment provisions include formulas designed to address problems, and can protect both the borrower and contractors from price fluctuations. Price adjustment formulas allow contractors to offer more realistic prices at the time of bidding. Despite concerns that they may lead to budget uncertainties, price adjustment formulas will estimate the actual cost implications that will be encountered. They use indexes that can be used for cost projection.

According to Asia Development Bank (ADB), any contract with a delivery or completion period beyond 18 months should contain an appropriate price adjustment clause.

In the scenario, the crude oil contract is planned to last 36 months. This period is pretty long with a fluctuating commodity. Therefore, the company should use price adjustment agreement.

Competitive bidding is generally recommended for high-value or complex purchases where the cost and time required for the bidding process are justified. For low-value, routine items like pens, the time and resources required for competitive bidding may outweigh the potential cost savings, as noted in CIPS best practices. Hence, Option C is the best answer.

Developing specific negotiation strategies in areas where risk or spend is high involves analysing a wide range of objectives and variables within the context of the organisation's business requirements. The first stage in any negotiation preparation is to define your overall objectives which may be related to a single variable such as price in the case of a standardised requirement, or many variables in the case of capital equipment. Your negotiating strategies and tactics will all be focused on achieving overall objectives.

Distributive bargainingfocuses onmaximizing one's own gainat the expense of the other party. Common tactics includewithholding informationandcoercion. It is typically used in zero-sum negotiations where parties compete over a fixed value.

“Tactics in distributive bargaining include withholding key information, making extreme opening offers, and using pressure to achieve concessions. These are aimed at maximizing individual outcomes.”

(L4M5 Commercial Negotiation, 2nd edition, Section 3.5 - Tactics of Distributive Bargaining)

Mark-up % = Profit ÷ Cost × 100. Here, profit is $80, cost is $160. So, (80 ÷ 160) × 100 = 50%. This differs from margin, which is profit ÷ selling price. Mark-up analysis helps buyers understand supplier pricing structures, detect hidden margins, and strengthen negotiation. By knowing whether a supplier is working with high or low mark-up levels, buyers can challenge prices more effectively or justify alternative offers. This analytical preparation supports objective negotiation rather than reliance on supplier claims.

Using threats is generally inappropriate in strategic supplier negotiations where a long-term, trust-based relationship is required (C). Threatening tactics can damage the relationship and may result in resistance from the supplier. CIPS advocates for collaborative approaches in strategic relationships to foster mutual trust and achieve sustainable agreements.

Direct costs are those costs of a product/service directly attributable/traceable to its production, for example, the costs of labour and materials directly used to produce the goods/services which the organisation sells.

Supplier bargaining power is stronger when there arefew suppliers,low volume requirementsfrom buyers, and when suppliers possessunique capabilities or technology(like specialized machinery). These conditions reduce buyer leverage and increase supplier influence.

There are many tactics and ploys that can be used to persuade others, particularly those not trained in negotiation. But in general these tactics should be used with care, as they can backfire; and in situations where a long-term relationship is desired, they can be, if detected, become an irritant to TOP.

Tactics are particularly effective if and when you are dealing with untrained negotiators, in consumer's buying situation and in once-off encounter.

Having a BATNA:

Increases assertiveness (A): Knowing the fallback position empowers the buyer to negotiate more confidently.

Reduces the chance of a poor agreement (B): A BATNA ensures the buyer does not feel pressured to accept suboptimal terms.

Identifies walk-away points (F): It sets a clear boundary, allowing the buyer to exit negotiations if terms don’t meet minimum requirements.

These align with CIPS’s guidance on using BATNA to strengthen negotiation strategies.

In the MIL framework, “Must have” refers to non-negotiable elements. For Colin’s organisation,ethical and sustainable procurementis a core, uncompromisable value, making it a “Must have” in negotiations.

Closed questions are effective for concluding negotiations, as they often elicit straightforward yes-or-no responses, helping to finalize terms and confirm agreement on specific points. This approach facilitates a clear and concise close to discussions, ensuring that both parties confirm their commitment to the agreed terms, as recommended by CIPS negotiation strategies.

There are four types of questions that can be used in a commercial negotiation:

Hypothetical questions, where you ask about a possible situation or abstract concept, are very useful at the testing and proposal phases. Hypothetical question does not state any commitment as it is only about 'if something happens, then ...'. This type of question can be useful at giving suggestion.

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LO 3, AC 3.3

Open questions begin with “how,” “what,” “why,” etc., and are designed to encourage detailed responses. The supplier’s questions are open-ended and aim to gather comprehensive feedback, which can inform better mutual understanding and potential deal improvements.

The question asks about the point in time when Jane should make concessions with the supplier. These concessions should be traded after preliminary stages such as opening, testing and proposing are over and proposals move from being tentative and general to being more definite and specific. This stage is called bargaining phase. The bargaining phase is the 'meat' of the negotiation meeting.

LO 3, AC 3.1

At the proposing phase either side may start making tentative proposals regarding their offering. In the case of negotiation where TOP has already submitted a tender or proposal, this stage may provide an opportunity for them to make proposals to improve on their initial offers in general or in areas highlighted by the buying side in advance.

The word 'if' is very useful at this stage and allows you to test tentative proposals without committing yourself. Skilled negotiators use language very carefully. The questions with 'if' are hypothetical ones.

LO 3, AC 3.1

Referent power is based on personal relationships and the respect or admiration one earns within an organization. Given Mike’s positive relationships and his rapport with team members and other departments, he is most likely to have referent power. This power type is influential in negotiation as people are more willing to work with someone they respect, as outlined in CIPS power dynamics in negotiation.

Break-even analysis identifies the sales volume required to cover fixed costs. It relies on:

Fixed costs (constant regardless of output).

Using logic involves applying numerical data and factual evidence to support arguments in a negotiation. Logical reasoning appeals to objective analysis rather than emotional or coercive tactics and is effective in convincing the other party through structured, fact-based arguments, aligning with CIPS's guidance on logical negotiation techniques.

MIL criteria indicate 3 limits that negotiator should establish:

M - Must achieve: minimum target/maximum you can concede on this point; the mandatory requirement or fall back position

I - Intend to achieve: realistic target you are aiming for on this point

L – Like to achieve: stretch target to achieve on this point.

PPCA is purchase cost analysis

TIMWOOD indicates 7 types of waste in Lean principles

The RAQSCI model is a mnemonic summary of a business model used to define and structure business requirements

Elasticity refers to the responsiveness of quantity demanded or quantity supplied to a change in price or another factor.

In microeconomic graphs, elasticity and inelasticity can be shown by the slope of the demand curve. If a demand curve is almost horizontal, then the product pricing can be described as very elastic. If a demand curve is almost vertical, then the product pricing can be described as very inelastic.

The formulae of elasticity:

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LO 2, AC 2.2

There are two major persuasion methods: 'push' and 'pull'.

Persuasion can be defined as encouraging someone to do something that you want them to do for you. Persuasion is reasoning with someone so that they will believe or do something they might not otherwise do. Persuasion can be considered as 'pushing' on TOP so that they can accept the change in attitude or behaviour as a result of your actions.

Influence is the ability to affect the manner of thinking of another. Influence can be considered as pulling on TOP so that you achieve the same result, but TOP feels they have changed their attitude or behaviour as a result of their reflection and thinking, and not your direct actions.

There are multiple variables to consider when choosing between 'push' and 'pull'. Professor Fiona Dent of Ashridge Business School proposes situations when each style might be most appropriate, breaking down push into 'directive' and 'reasoning' and 'pull' into 'collaborative' and 'visionary':

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Using logical and objective reasons is one of the typical characteristics of persuasion reasoning method.

In the scenario, the main cost driver is suppliers' mark-up. The priority should be limit the margin to be added. XYZ Ltd can agree “cost plus” contracts with their suppliers to ensure no IT product purchased exceeds an agreed maximum margin level. Procurement teams can use their benchmarking tools to police these contracts. Cost plus contracts are agreements where the contractor's pricing is based on itemising allowable costs and then adding an agreed margin.

Market penetration pricing - pricing low to win a large share of the market

Market skimming - pricing a new product high in order to make a large profit from the purchases by initial customers. This is an effective strategy only in the absence of competition.When competition appears, market skimmers usually drop their prices

Premium pricing - usually pricing high because the market is prepared to pay extra for the kudos associated with the product, thanks to, say, a reputation for quality, or a highly fashionable brand name, and so on

As a financial metric, the margin of safety (safety margin) is equal to the difference between current or forecasted sales and sales at the break-even point. The margin of safety is sometimes reported as a ratio, in which the aforementioned formula is divided by current or forecasted sales to yield a percentage value. The figure is used in both break-even analysis and forecasting to inform a firm's management of the existing cushion in actual sales or budgeted sales before the firm would incur a loss.

This is a question that a student met in her actual exam. The margin of safety is not even mentioned in the CIPS study guide.

When facing a monopoly supplier, buyers must find creative ways to introduce leverage. Publicly exploring alternative solutions can create the perception of competition or a fallback plan, thus shifting bargaining power slightly toward the buyer.

Legitimate poweris derived from theposition or authorityheld within the organisation. It supports the buyer’s ability to influence negotiation outcomes based on formal responsibility, legal rights, or contractual mandates.

“Legitimate power stems from formal roles, authority or responsibility. It enables negotiators to assert terms backed by organisational policy or legal mandate.”

(L4M5 Commercial Negotiation, 2nd edition, Section 3.1 - Organisational Power Structures in Negotiation)

Closed questions are designed to elicit specific, factual responses — typically “yes” or “no” or a brief piece of information. These are particularly useful when verifying details during negotiation. For example, asking “Did you receive the revised schedule on Monday?” ensures clarity and reduces ambiguity.

The objective of the buyer here is to improve supplier cost structures over time, which requires them to have insight into supplier's current cost information. Purchase price cost analysis (PPCA) can help here. PPCA is a method for gathering, analysing and using price and cost information in a systematic way. The process allows the identification of future savings and opportunities to improve current costs.

STEEPLE analysis is used to analyse the macro environment that may have impact on an organisation.

Competitive rivalry is a part of Porter's Five Forces which is a tool for strategy making.

Volume concentration is a way to increase the purchasing quantities in order for a buying organisation to improve its leverage in negotiation.

In the scenario, to exchange cost cutting, the purchasing manager promises to 'reward' supplier shorter payment period. This is an example of reward power, which results from one person's ability to

compensate or reward another for compliance.

The reward does not need to be money, but could be introduction to other buyers in the group, positive references, agreement to trial new product, quicker payment or indeed any other variable that the buyer

knows is attractive and valued by the supplier.

Integrative negotiation is a negotiation strategy in which the involved parties work together to find a solution that satisfies the needs and concerns of each. This process often involves group brainstorming and creative thinking for individuals to suggest different ideas that benefit both parties.

Compromising is often common in integrative negotiation, and both sides may need to give up certain needs to reach a solution. Honesty can also promote successful integrative negotiation because it can lead to a comprehensive understanding of the issue and what each party needs to be satisfied with the result.

Variable costs change in proportion to production volume, such as packaging, raw materials, and delivery. Fixed costs (rent, insurance, loan repayments) remain constant regardless of output. Recognising the difference is crucial when negotiating supplier pricing, as variable costs are often more open to tradeable adjustments (e.g., bulk discounts). Buyers who understand cost structures can challenge inflated fixed allocations or negotiate on genuine variable elements. This knowledge is vital in price breakdown discussions and in cost-modelling negotiations.

LO 2, AC 2.1

Closed questions are useful for verifying facts, as they prompt specific, concise responses. These questions allow the negotiator to confirm details without ambiguity, which is crucial for clarity in negotiation settings, as highlighted in CIPS’s guidelines on questioning techniques.

Sally's objective is to achieve a 5% saving. If the supplier offers this saving in a different form (aftercare package), and the total value meets her goal, then accepting this alternative shows flexibility and supports a collaborative,win-winoutcome.

A collaborative relationship is characterized by mutual commitment, which enhances risk management and strategic planning between buyer and supplier. High levels of trust and commitment enable both parties to work closely to achieve shared objectives, creating a beneficial negotiation environment. This approach aligns with CIPS’s principles of collaborative procurement relationships.

An organisation's expense can be categorised into three groups:

Fixed Costs – costs that do not change with output.

Variable Costs – costs that vary in direct proportion to output.

Semi-variable costs – costs that are a combination of the above, with both a fixed and variable element.

Among the four options:

"Land rental paid in advance": This is fixed cost. The rental won't increase when the production increases.

"Additional pallet hires due to higher demand in year-end season": This can be identified as semi-variable cost (or step cost).

"Governments taxes": The taxes are often levied by a percentage of income or revenue. Therefore, it is variable

"Raw materials for next year production": This is obviously variable cost.

Negotiation doesn't end after the contract is awarded. The needs for negotiation can arise in any post-award stages. For example, at supplier development and relationship management stage,improvement in supplier capability, capacity, and product/service range can be negotiated. Negotiations with long-term strategic critical suppliers should be carried out in a partnering style, with a win-win starting point assumed.

In some sectors such as transport, utilities and infrastructure, tenderers may 'bid low' or even make a loss to win major contracts with a view to negotiating lucrative changes, variations and 'add-ons' over the life of the contract when the supplier is bedded in and the buyer is in the weaker position to push back or challenge. Even in less complex contract, it is very likely that there will be a need to negotiate with that supplier again after the awarding of the contract.

LO 1, AC 1.1

The mark-up percentage is calculated as the profit divided by the cost of production, then multiplied by 100 to convert it into a percentage.

Calculation:

(

80

/

160

)

×

100

=

50

%

(80/160)×100=50%

Thus, the supplier’s mark-up percentage is 50%, as per standard pricing calculations used in procurement.

Dynamic pricing is the practice of dynamically calculating the price of a product or service in order to incorporate real-time market conditions, input costs, and/or competitive perspectives. Dynamic pricing which is based on marginal costing, is used by airlines and many other organisations.

Marginal cost is the cost of producing an additional unit of output. Marginal Costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.

Asking questions the right way is both an art and a science. Ask the question the wrong way, and the other negotiator might act like a turtle, becoming defensive and withdrawing into their shell. Ask the question the right way, and the other negotiator might “spill the beans.”.

Closed Questions: How and when to use them?

Closed questions are those that require a short and focused answer, and are especially helpful in the beginning stages of the negotiation to encourage interaction. They can be used to clarify a point, or to reconfirm certain facts. For example, you can use a closed question to confirm the amount of units the company can produce in a week, or to clarify that what they are really saying is that they don’t feel comfortable outsourcing their accounts to India. Most closed questions only require a simple “yes” or “no” response, so there really isn’t much room for misinterpretation – great for finding out where both you and they stand.

Below are some examples of cost input that can be analysed in PPCA process:

- Material costs

- Process and labour costs

- Employment costs

- Overhead costs

- Distribution costs

- Depreciation on equipment

- Profit

If you want to learn more on PPCA, you can study from OGC document here: https://webarchive.nationalarchives.gov.uk/20100609100650/www.ogc.gov.uk/documents/Cost_Price_analysis(1).pdf

LO 2, AC 2.1

Trust is the expectation that the other party will behave in a predictable and mutually acceptable way. In inter-firm relationships, the presence and absence of trust can affect the level of cost in a relationship. The existence of trust is taught to lower the transaction cost in a relationship. Dr. Mari Sako identified taxonomy of 3 types of trust in commercial relationship, which is very useful from the perspective of procurement.

Contractual trust: Trust based on the contract with TOP. This is potentially the weakest source of trust if there is nothing else to base the trust on, but it is the quickest to establish.

Competence trust: Trust based on TOP's professional qualifications or proven or certified technical capability or experience.

Goodwill trust: Trust based on knowing TOP has your interest at heart and will not behave opportunistically. This is potentially the strongest type of trust, but it takes the longest time to build.

The supplier is using Rational persuasion by providing logical reasons, such as economic conditions and increased costs, to justify the price increase. This approach uses factual information to influence the buyer's decision, aiming to present the price hike as a reasonable adjustment, which aligns with CIPS strategies on influencing tactics in negotiations.

There are many macro economic factors that could influence procurement in general and commercial negotiation in particular. Below are six factors that are agreed to be fairly significant:

• Economy growth rate

• Inflation rates

• Interest rates

• Currency exchange rate

• Unemployment rate

• Protectionism

LO 2, AC 2.2

The analysis of cost into fixed and variable enables organisations to determine their break-even point (BE) - the point where total revenue from sales and total cost exactly balance. All costs need to be covered by sale revenue in order for a company to make a profit. If you know your fixed costs and your variable costs then you can work out the minimum quantity of goods or services you need to sell to break even. Break even point is measured in volume and can be worked out graphically or via formulae:

Price - Variable costs = Contribution

Break even point (volume) = Fixed expenses/Contribution margin per unit

In this scenario, the break even point (Q) is: 270,000/(180-126) = 5,000

To make a profit, the supplier needs to sell more than 5,000 units per month.

The BE point is thus an important determinant of flexibility of pricing for suppliers. Before BE is achieved there will be much greater reluctance to offer price concessions to customers than after BE is achieved.

LO 2, AC 2.1

By removing the requirement for named personnel, CDL could allow the supplier flexibility in allocating equally competent but possibly less expensive staff. This tradeable does not compromise on quality but helps control costs.

Knowing supplier's fixed and variable costs is beneficial for the buyer in a negotiation. With these insights, the buyer would know the volume at which the supplier reaches break-even points and then offers significant discount due to economies of scale.

Tradeables—variables such as price, delivery, quality, and payment terms—are introduced in the bargaining stage of negotiations. This is the phase where both parties test positions, make concessions, and trade issues to create acceptable packages. Proposing and opening are earlier stages focused on setting out agendas and clarifying needs, while closure comes after tradeables are resolved. Introducing tradeables too early can weaken leverage, and leaving them too late risks deadlock. Bargaining ensures the structured exchange of concessions while protecting the overall bargaining mix.

Understanding where and with whom your supplier spends their money, or understanding the 'cost breakdowns' or 'price build-up' of the goods and services you purchase from the supplier, will help you know

where and when they can offer price concessions.

Cost information can be expressed with more impact through graphs that can be created using Excel and PowerPoint or other softwares. There are two commonly used models known as 'spend waterfall'

and 'spend tree'. Spend waterfall shows the build-up of costs, while the spend tree shows all the spends that an organisation makes.

There is no graph known as 'spend candlesticks'. Candlestick chart is a style of financial chart used to describe price movements of a security, derivative, or currency.

The aggregate expenditure model is a method of calculating GDP. The aggregate expenditure model focuses on the relationships between production (GDP) and planned spending: GDP = planned

spending = consumption + investment + government purchases + net exports.

Trust may create value as following:

LO 1, AC 1.4

Foreign exchange rates impact import costs, profit margins, and overall turnover when transactions are conducted in foreign currencies. Understanding these fluctuations allows buyersto anticipate changes in purchasing costs, supporting informed decision-making, as highlighted in CIPS guidance on global procurement considerations.

“Expanding the pie” is a strategy used in integrative negotiations where both parties collaborate to increase the total value available before dividing it. This leads to mutual gains and supports long-term, strategic relationships.

Tradeables—alternative offers or concessions—are typically introduced during thebargainingstage of the negotiation. This is when both parties discuss and exchange proposals to reach a mutually acceptable agreement.

In some markets, suppliers experience peaks and troughs in demand and so buyers can increase their leverage through developing an understanding of how busy their vendor are at particular time during the year or business cycle and targetting at quieter period. Similarly, if a buyer can develop an understanding of supplier capacity and to what extent have they covered their fixed cost, they may be able to target suppliers when their average costs are likely to be lowest. Vendor's average costs will be higher at low and high capacity utilisation.

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According to Paul Steele's 'The Seller's Perspective', customer can be classified into 4 categories as below:

To increase the leverage in negotiation, buyer may increase its attractiveness and/or increase spend value. In this scenario, the buyer is already attractive to supplier as it always pays on-time, but the spend is still low. So to have greater leverage, the buyer has to increase its spend volume by spend concentration. Spend concentration may take many forms as following:

- Vendor base reduction

- Volume pooling

- Volume redistribution

- Volume consolidation across categories

- Standardisation and harmonisation of specifications

- Forming purchasing consortia

LO 1, AC 1.3

There are two major persuasion methods: 'push' and 'pull'.

Persuasion can be defined as encouraging someone to do something that you want them to do for you. Persuasion is reasoning with someone so that they will believe or do something they might not otherwise do. Persuasion can be considered as 'pushing' on TOP so that they can accept the change in attitude or behaviour as a result of your actions.

Influence is the ability to affect the manner of thinking of another. Influence can be considered as pulling on TOP so that you achieve the same result, but TOP feels they have changed their attitude or behaviour as a result of their reflection and thinking, and not your direct actions.

There are multiple variables to consider when choosing between 'push' and 'pull'. Professor Fiona Dent of Ashridge Business School proposes situations when each style might be most appropriate, breaking down push into 'directive' and 'reasoning' and 'pull' into 'collaborative' and 'visionary':

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In the scenario, Rose intends to let both parties exchange their views and ideas so that solutions to current problems can be found. This is the typical characteristic of collaborative (pull) method.

Mark-up is defined as profit expressed as a percentage of the cost. It calculates the profit margin based on the cost price rather than the selling price, which allows companies to determine how much they are earning over their production or purchase costs. This aligns with standard accounting and CIPS definitions of mark-up in procurement contexts.

Essentially, for trained negotiators under most circumstances, the physical locations of negotiations and the room layout should not make much difference to the outcomes of the meeting. It is reasonable to assume that most commercial negotiations are based at least initially on a principled- or pragmatic-type approach. It is arguable also that any advantage gained through intentionally creating an uncomfortable environment to put short-term pressure on TOP is likely to be short-lived as TOP will likely reflect on this later and seek means to get even.

A negotiating team can be as few as two people, and one person can play one or more of these roles:

As from the scenario, Jasmine will act as an observer and a scribe (or secretary).

Delivering on commitments is fundamental to building high-trust relationships. When an organization reliably fulfills its promises, it reinforces the supplier’s confidence in the partnership, fostering long-term collaboration. While contract management and audits are supportive processes, delivering on commitments directly strengthens trust, as emphasized in CIPS best practices for relationship management.

Involving an appropriate cross-functional team is beneficial for effective commercial negotiation because it brings together diverse perspectives and expertise relevant to the negotiation context. According to CIPS, a cross-functional team ensures that all aspects, such as technical, financial, and operational inputs, are considered, leading to more balanced and informed decision-making. This approach also helps in addressing complex negotiation elements effectively.