The procurement process involves the acquisitions of services and goods from an external source via the incorporation of a tendering process. Efficient supply must satisfy the desires of the buyer regarding timely delivery, quality, quantity, and location specifications. Similar to other industries, the aviation sector is characterized by outsourcing and purchasing in the sections of repair and maintenance and airline operations among others. The procurement department has to be keen during the identification and eventual provisioning of the goods or services to ensure that the management makes strategic decisions. This report assesses the methods of negotiating a performance-based contract when procuring goods and services in the aviation industry.
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The performance-based contract entails a result-oriented method of contracting that lays focus on the quality, outcomes, and outputs that relate to at least a portion of the buyer’s payment, contract renewals, or extensions (Kleemann & Essig 2013). The process leads to the attainment of particular measurable performance requirements and standards. The contracts may comprise incentives and disincentives that are both monetary and non-monetary.
The performance-based logistics approach establishes metrics for weighing both performance and contacting payment (Olmos- Sanchez, Bocquet, & Forman 2016). The parameters used in the contracting process include reliability, maintainability, the cost of ownership, and availability. The performance work statement describes the required outcomes rather than the procedure or number of hours needed to accomplish the work.
Advantages of performance-based contracts
Such contracts allow the procurement department to acquire goods and services that coincide with the objectives of the company. The contractors attain the autonomy when formulating strategic decisions on how to accomplish their goals, which engages them in innovative approaches (Kleemann & Essig 2013). In this regard, companies in the aviation industry acquire the best value for services and products, thus fulfilling the customers’ demands.
The adoption of performance-based contract especially in the airline industry brings potential benefits through aligning incentives between the customers and the suppliers. The selection of the right supplier allows open and equal competition coupled with transparency because the potential bidders are chosen based on their qualifications and due diligence (Kleemann & Essig 2013). Furthermore, performance-based contracting allows for the evaluation of the contractors’ performance using a quality assurance plan.
Disadvantages of performance-based contract
It is challenging to measure the effects of PBC on product reliability in cases where heterogeneous customer preferences exist for contract types. The customers’ contract choice decisions ought to be modeled explicitly to avoid erroneous conclusions on the absence of significant consequence of contract type regarding the reliability of products (Olmos- Sanchez, Bocquet, & Forman 2016). Secondly, poor choice of potential contractors would result in adverse repercussions. The idea of neglecting to deploy elements of partnering and past evaluation performance by the procuring organization during contractor identification results in lower value and poor performance. Besides, poor communication and inefficient business relationships would hinder the implementation of the stipulated terms and conditions that guide the management of contract performance.
Competencies of a successful negotiator
A good negotiator ought to develop a plan before engaging the other party in the concession process. One ought to establish the most preferred negotiation style by the counterparts to aid in communication and making educated guesses and adjustment as the bargaining proceeds (Chirodea & Soproni 2013). The negotiators have to know their interests and those of the other party to allow space for mutual sharing and opposition when different views arise. Prior planning allows successful negotiation by avoiding positional compromises on top of encouraging joint problem solving.
A good negotiator will avoid dominating a conversation. Listening is the only way that one can establish the interests of the other party and it provide a platform for asking questions. The negotiator obtains information through selective listening by noting the issues that are deemed relevant to the transaction under discussion (Chirodea & Soproni 2013). Responsiveness and playbacks are additional listening techniques that orient a good negotiator in comprehending the desires of the other party. Consequently, efficient bargaining offers solutions thereby allowing different parties to engage in business transactions. Good persuaders are perceived to value healthy relationships and trustworthiness in the business including the aviation industry.
Proper choice of questions
Questions are important to understanding the nature of business conciliation. The negotiator has to exhibit vast knowledge concerning the products and services under discussion. The success of business persuasion process is dependent on the capacity of the negotiator to ask questions that are not only linked to the price but other associated benefits that customer acquire from a particular sale. For instance, in the aviation industry, the negotiator must ensure timely procurement of products such as fuel and spare parts as well and maintenance services and interiors by persuading the supplies to deliver quality goods at low costs. Other attributes of a successful negotiator comprise patience, general practical intelligence, and the ability to exploit and perceive power.
Steps and activities involved in the management of a negotiation to buy jet fuel for an airline
The pre-award phase
During the management of negotiation to buy jet fuel, the pre-award phase is essential in the establishment of healthy business relationships. The major activities involved in this phase include the procurement planning, solicitation planning, and the eventual tender process. Other associated tasks during this phase involve the verification of the fuel requisition form, reviewing the evaluation criteria, and establishing an effective methodology for contractor selection. The sellers’ steps under this phase are characterized by presales activity, bid/no-bid decision-making, and proposal preparation. During the negotiation process, the fuel buyer has to identify potential sources and assess the uncertainty that will accrue from the purchase process (Belobaba, Odoni, & Barnhart 2015).
The award phase
This phase entails an array of tasks that accrue from bid issuance to awarding of the contract. When procuring jet fuel, the buyer evaluates the offers, identifies a seller, and awards the contract after a negotiation of the terms and conditions (Belobaba, Odoni, & Barnhart 2015). Before the source of the jet fuel is selected, the procurement planners have to assess their market of operation and initiate procedures and criteria for evaluation of individual sources. The sellers’ step in the award phase is contract negotiation and formulation that allows the parties to acquire mutual expectations and understanding.
The post-award phase
In this phase, the activities of both the seller and the buyer involved in the negotiation to procure goods or services are similar. The two parties engage in contract chase out and termination. The undertakings under this phase include approval for last payment of jet fuel, proof for delivery, and addressing the claims of the contractor (Belobaba, Odoni, & Barnhart 2015). Additionally, final payments are made alongside receiving the contractor’s performance.
Factors that determine source selection criteria for supply of goods and services
Value for money
During the procurement process, the source selected by the buyer must offer products and services at low cost. The prices and quality attributes of the supplies must coincide with the expenditures incurred by the purchaser (Abdollahi, Arvan, & Razmi 2015). The benefits accruing from the supply agency have to exceed the cost to win the favor of prospective buyers. Due to increase in the competition among the supplier of homogenous good and services, the customer opts for dealers who offer the highest value for their money.
Quality and safety
Most consumers often consider the quality and safety assurance of products and services before making the initial decision of purchase. Since aviation is a transportation industry, stringent security measure ought to be observed to prevent accidents can result in the loss of life and damage to property. Poor quality has some detrimental consequences of inflated manufacturing costs, loss of business, and decreased productivity.
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Service and delivery reliability
The selection of the sources of supply is dependent on reliability. The suppliers must serve the potential buyer without creating violations in the expected delivery time for goods and services (Abdollahi, Arvan, & Razmi 2015). Most buyers opt for sources that have less lead-time and no stock-outs. Delays in the delivery of procured goods and services translate into higher production cost due to loss of resources regarding labor hours. In this regard, consistent supply is a mandatory determinant that buyers incorporate before making decisions on the best procurement source. Other factors that business organizations make including the aviation industry during the identification of best source include risk, agility, convenience, social responsibility, and experiences with the supplier.
Efficient procurement is a vital requirement for business to thrive and especially the aviation industry. The performance-based contract ensures that organizations acquire a better value and performance by reducing the costs. A successful negotiator ought to exhibit various positive attributes such as patience, listening skills, and prior planning to gain an upper hand in business transactions. The pre-award, the award, and the post award phases are critical when undertaking contractual negotiations. Besides, the source selection during the procurement process is determined by value for money, risk, reliability, and quality among other factors.
Abdollahi, M, Arvan, M & Razmi, J 2015, ‘An integrated approach for supplier portfolio selection: Lean or agile’, Expert Systems with Applications, vol.42, no.1, pp.679-690.
Belobaba, P, Odoni, A & Barnhart, C 2015, The global airline industry, John Wiley & Sons, New York.
Chirodea, F & Soproni, L 2013, ‘Competences and skills training for the European negotiator provided by Romanian Universities’, Studia Universitatis Babes-Bolyai-Studia Europaea, vol. 54, no. 4, pp.145-162.
Kleemann, C & Essig, M 2013, ‘A providers’ perspective on supplier relationships in performance-based contracting’, Journal of Purchasing and Supply Management, vol.19, no.3, pp.185-198.
Olmos-Sanchez, D, Bocquet, J & Forman, M 2016, ‘A Systems approach to improve performance in supply chain: case study in a procurement process in the aeronautical industry’, in D Krob (ed), Complex Systems Design & Management, Springer, Berlin, pp. 297-297.