Excessive Demands During Negotiations … Essay
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Pacific Oil Negotiations
The author of this report has been asked to review a case study that pertains to Pacific Oil and their negotiations with customer Reliant over the late 1990's and 2000's. As part of this analysis and summary, there will be a few general questions and points answered. These points include the general interests of each part, the strategies and tactics that were used, what Pacific could have done differently and why, what Reliant could have done differently and why and some overall recommendations about all of the above and what could or should have happened instead. Any recommendations made will be decisive and will be accompanied with some strong rationale to support the given assertions. While Pacific and their negotiators partially have themselves to blame because they have a single client that is such a large chunk of their revenue, Reliant absolutely cleaned their clock with their "death by a thousand pricks" negotiation style and Pacific is basically getting nothing in return for their concessions but a little time on the contract, which will be inferior for Pacific if Reliant ever agrees to it.
The overall process and performance goes fairly well for both companies at the onset. For their initial contract, things go smoothly, Pacific makes a tidy profit and both companies later agree to a reasonable extension. However, when that second contract is starting to run its course, things get a little dicey. The market starts to fluctuate and become chaotic. Given that, Pacific thinks it wise (and rightly so) to lock down Reliant for as long as they can, preferably for the next five years. Reliant does not reject the idea outright but later decides that they would prefer two years. They later meet in the middle and suggest three years would work. This is one of the few concessions that Reliant makes but they more than try to make up for that concession later.
As things grind on, it is clear that both companies are keenly aware that the market is a little jumpy and both firms want to protect and control their future. Pacific's angle is obviously to get Reliant locked in and keep them in the fold for as long as possible for a reasonable price. When negotiations first start, Reliant tinkers a bit with the pricing calculations but the two parties come to a fairly reasonable agreement. Again, Reliant more than makes up the compromise later on. However, Reliant has their own concerns. First, they don't want to have a glut of product that they can't use. However, the way in which they go about "protecting" themselves is a bit unseemly. First, they want he mandated purchase amounts lowered to what would seem to be artificially low levels. Perhaps the perception on the part of Pacific that the projections for needed product as being too low is off-based, but then things get silly.
Subsequent to another compromise, Pacific makes several demands that, especially altogether, would seem to be a bit ridiculous. First, they implicitly accuse Pacific of bilking them (albeit perhaps unintentionally) and then demand that Pacific install a meter that costs $20,000 to install to make completely sure that the amount sold is the amount moved into Reliant's possession. Second, they demand clauses that basically make the negotiated prices meaningless. Basically, if the market dives and Pacific has to offer lower rates on future contracts, Reliant automatically gets a price cut that reflects any difference in Reliant's disfavor in terms of price. For example, if Reliant first negotiates ten cents a gallon and a later contract with a different client provides for eight cents, then Reliant immediately gets eight cents themselves, and so on. If that were not bad enough, Reliant decides that they can revisit the mandated volume of buying issues covered before, but instead insisting that they be able to resell product they do not need if and when the situation calls for it. Something else that actually persists over all of the different events above is that there are approvals needed, life events keep happening and the negotiations actually end up stretching out for a very long time.
To put things concisely, Reliant has Pacific over a barrel and they seem to know it. Whether they really know it or not, they are milking Pacific in terms of concessions and they are dragging out the process time and time again. As noted above, there are times where each side has suggested a solution for part of the agreement, the other side has counter-offered and there is a meeting of the minds in the middle. That is a normal and expected part of negotiating. However, the demands requested and concessions required by Reliant are clearly excessive and the Pacific people are doing little to nothing to stop the bleeding. As noted before, Pacific has sort of painted themselves into a corner because not having the revenue of the Reliant deal would be a big problem. Further, potential avenues for future revenue are up in the air due to indecision and waffling on the part of other Pacific management. The waffling over whether to open their own product line to sell would be an example of that. The purchasing managers and everyone else involved in the negotiating chain needs to know what can be done, what cannot be done, and truly how "expendable" a demanding client like Reliant can be. After all, if Pacific cannot make a profit on the Reliant sale, there is no point in the sale taking place.
In terms of what the two sides could have done differently, the Reliant side of that coin will be discussed because that part of the equation is a lot shorter. Basically, Reliant can't really be blamed for trying to get the best deal they can, but they are playing with fire by being so demanding. Further, one of the major reasons they are playing with fire is because while there are other players in the industry, they are much smaller and have been around for much less time. Thus, Reliant might find themselves in a bit of a pickle if Pacific balks and decides that they're done doing concessions. If Reliant pulls the trigger and bolts when their contract is up, they could absolutely find themselves in trouble if their new supplier or suppliers are not up to the job. Even so, Reliant is technically not doing anything illegal or even unethical. Pacific put themselves in their awkward situation and so long as the contract is legally enforceable and involves the proper components, Reliant should truly go for what they want. However, they really do need to decide if they're really willing to leave Pacific for a competitor or if they are just bluffing to get a good deal. Overall, Reliant would probably be wise to stick with Pacific as there is obviously a history there (both personal and in general) and a lot of that cannot be said for the alternatives to sticking with Pacific. Reliant would be wise to stick with Pacific in the end but they should obviously carve out the best deal they can given the ambiguity and chaos of the market and the wider economy.
As for what Pacific should be doing differently, there are two major things but they are strongly related. First, Pacific should insist that the decision-makers for both parties all meet at the same time and in the same place. Even if it requires teleconferencing and the like, these meetings in airports and meetings being weeks or even months apart is just allowing Reliant to stretch the process and take another nibble with each new set of meetings. This leads to the second point and that is that Pacific needs to find a backbone and assert that they have made enough concessions and that they deserve a right to be protected from market fluctuations as well. Indeed, while Reliant is trying to plan for the future, Pacific is in the same boat. They have a right to know, within a reasonable margin, how much revenue is coming in. There is a reason these prices are nailed down in advance. There is a reason why companies who do not buy the required and mandated amounts are penalized. It is completely fair for Reliant to be careful about not over-extending itself but it would seem that they are overplaying their hand just a tad and low-balling what they really think will happen when it comes to what they are telling the negotiators from Pacific.
The primary reason that the author of this report thinks that Reliant is actively trying to take advantage (or even bilk) Pacific was two-fold. The hedging about the mandated volume of material bought was the cracking open of the door but the meter talk just kicked the door open. Citing "spot measurements" that "indicated otherwise" is pretty seedy. If the author of this report were to ever levy such an accusation, firm evidence to support… [END OF PREVIEW]
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