Government Procurement Through Price Negotiations - Report Example

Government Procurement Through Price Negotiations Rupert (2003) s that one of the tips given for conducting successful negotiation is “do your homework”. For government agents, this includes having knowledge of the product and market. Regarding the procurement of goods, one would be more inclined to believe that if quality and quantity are easily ascertained, pricing issues involving government procurement, would be at a minimum. If this is so, the situation boils down to whether pricing should be based of full cost, marginal cost, or some method to benefit the government agency as well as the firm supplying the good. Hyman (1993) argues that in the most competitive market, substitute goods are differentiated by design, wrapping, or other such features. The market has a larger number of sellers with the individual seller forced to sell at “near equal” prices. Furthermore, to remain in this market, suppliers must be efficient. We could, therefore, gather from this that suppliers in this market will sell to government agencies at the lowest possible price, that the goods will be of the highest value, and that price is a true indicator of quality. Intense competition forces manufacturers to make their products intrinsically different, and this gives a room for different negotiated prices between suppliers and the government, as components such as service and delivery are included in the price. The heterogeneous nature of these markets will require more effort by government agencies to determine quality and similarity of prices. If procurement personnel is limited, government agencies could be forced to accept seller’s words, with the negotiated price and beneficial to the seller. Price Negotiation and Market Conditions: Price negotiation can assist in the transfer of goods between firms in an integrated unit and also in the acquisition of goods through outsourcing. In an integrated unit, the price at which goods are transferred is aptly labeled the “negotiated transfer price”, because it is determined by negotiation between the units. A negotiated price between firms in a business unit is expected to maximize the combined profits of the negotiating firms. The selling firm will not negotiate a price below its production cost, and the acquiring firm will not pay a price above that for which it can by the product for elsewhere. The reference to purchasing a good at a price not higher than that for which it can be purchased elsewhere indicates that market plays an indirect role, and serves more as a reference point for the determination of a negotiated transfer price. Because it is possible for two firms in an integrated unit to negotiate a transfer of price without at the same time agreeing on the quantity to be transferred as that price, there is no guarantee that the negotiated price will maximize the business unit’s value. There is also the possibility of a long, drawn-out, and time-consuming process which, when converted to a monetary value, could increase the cost of acquiring goods and services. Chandler provides a basic structure while arguing that for the public sector in the United States, goods and services are acquired mostly through outsourcing (1962, p.13). There are many reasons why, in recent times, the public sector and the private sector have increasingly sought to acquire goods and services through outsourcing. Among them are heightened competition between supply firms and the reduction in cost that competition causes, flexible production techniques and the willingness of producers to satisfy demand, and improved communications and the relative ease with which goods and services can be obtained from outside agents and within a short time frame (Chandler 1962, p. 13). The extent to which firms are expected to benefit by acquiring goods and services through outsourcing rather than through vertical integration depends on the price paid for the outsourced goods and services. When firms seek to acquire goods and services through outsourcing, the cost of these goods and services are determined in either the “spot” market, where the price is determined by market conditions, or the price is determined through negotiation, especially where there are long-term contracts (Brickley et al 2001, p. 448). Buying goods in the spot or competitive market could be advantageous as compared to a noncompetitive or negotiated situation, Brickley et al. continued, because it could easily be argued that because competitive firms do not make surplus profit over the long-run period, the market-determined price tends to be lower than a negotiated price (p. 448). However, even with the benefit from purchasing goods on the spot market, purchasing agents in private sector and procurement officers in the public sector have used negotiation and long-term contracts with a few vendors to acquire goods and services. There seems to be the feeling that through negotiation, there is more control over price, quality, and delivery. Although, as Cavinato and Kauffman (2000, p. 449) pointed out, this may be true for quality and delivery, the negotiated price is more dependent on the skillfulness of the parties ‘at the negotiator table’ and the conditions in the market. Between the two extremes are conditions of imperfect competition, where the number of sellers of heterogeneous or homogenous good can be large or small. Under this market form, the supplier has some control over “brand” price. Studies have shown that in the United States, most goods are traded under conditions where is some freedom to adjust price, and this would imply conditions of imperfect competition (Dobler et al. 1983, p. 242). We accept the conclusions of Dobler et al. as true, but we also believe that tightly budgeted expenditures and the encumbering of funds for future expenditure cause the government sector to secure goods under varying conditions of competition. To get the biggest “bang of the buck”, government procurement is forced into markets where the price will be “right” or most beneficial to the agency. Pricing of Services Hyman’s (1993) research indicates that employee’s compensation as a percentage of non-capital direct expenditure is between 30 to 40% at the state and local levels and 15 to 20% at the federal level. Jack Rabin (2005, p. 11) argues that economic theory proposes that labor should be paid according to its marginal revenue product, which is the marginal product of labor expressed in dollar value. This approach is only useful in the public sector, Jack (2005, p. 11) continued, where the output of labor is easily determined and where the government can determine the quality of the output. If quality and quantity are not easily determined, there is room for negotiated wage rate. Many factors that Jack (2005, p. 13) identifies that can determine the negotiated wages, these including union representation, skill of labor, and demand by the public sector, and wage rate in other sectors of the economy. There is also the additional issue of what price should the government pay labor when productivity of labor and wages in the other sectors of the economy increases faster than in the public sector. The issue is important, as Jack (2005, p. 11) argued, because depending on the policy chosen, the supply of labor in the public sector could decline, efficiency could fall, and the average cost of services in the public sector could increase. Here again, negotiations are important. To reduce the above problems, the negotiated price of labor should be closer to that offered in the more efficient private sector. Furthermore, because jobs in the public sector tend to be more secure and with the likelihood of more generous benefits, paying labor a rate closer to that paid in the more efficient private sector could attract labor from the private sector and improve the efficiency of labor in the public sector. Conclusion Even with the analysis outlined above, we understand that each procurement project is unique and complex and thus defies the use of a general rule or policy. We also believe that for each purchasing organization, the regulations and the rules are different. These complicate the procurement process. In the end, the procurement approach used and the manner in which it is implemented, will determine the success of failure of government’s projects. Because of the dynamic nature of today’s market, it is imperative that government agencies continue their vigilance on procurement procedures. References: Brickley, J., & Smith, C., & Zimmerman, J. (2001). Managerial Economics and Organizational Architecture. McGraw-Hill, pp. 448 Cavinato, J., & Kauffman, R. (2000). The purchasing handbook: A guide for the purchasing and supply professional. McGraw-Hill, pp. 449, 500. Chandler, A. (1962). Strategy and Structure. Chapters in History of American Industrial Enterprises. MIT Press; Cambridge, MA, pp. 13 Dobler, D., & Burt, D., & Lee, L., Jr. (1983). Purchasing and Materials Management: Text and Cases, 5th Edition. McGraw-Hill, pp. 242-244 Hyman, D. (1993). Public Finance. Dryden Rabin, Jack (2005). Encyclopedia of Public Administration and Public Policy: First Update. CRC Press, p. 10-11 Rhodd, Rupert G. (2003). Acquiring Resources Through Price Negotiation: A Public Sector Approach. Florida Atlantic University, Davie, Florida, U.S.A. Read More