Many industries have been hit hard by the corona crisis, supply chains were disrupted and often collapsed completely. Even though the cause was beyond the suppliers’ control, relationships between business partners suffered severely. Conversely, buyers snubbed their longtime suppliers by aggressive demands for cost reduction and more flexibility. In this situation, it is important for both parties to react in the right way. Research results of WHU - Otto Beisheim School of Management show how this can be achieved and which mistakes should definitely be avoided.
Simon H., head of B2B business at Polypellets, is deeply disappointed [names of persons and companies have been changed by the editors]. How can his long-standing customer put such pressure on him in this situation? He is well informed about the difficult situation Polypellets is in! Since the outbreak of the pandemic, the production lines of many of Polypellets' customers from the automotive industry have come to a standstill, and orders have collapsed. It is true: the price of oil has fallen dramatically as a result of the corona crisis. The manufacturer of interior components for cars, to whom Polypellets supplies plastic granulate, is now demanding that Polypellets should pass on the lower material prices. Simon H. considers this demand to be unabashed because Polypellets, as a medium-sized company, urgently needs the temporary additional margin in order to control its own liquidity problems. And after all, Polypellets has made everything possible to be able to continue supplying its customers. It is sobering that longtime partners are treating each other in this way!
Even if no one is to blame, there is a loss of trust
Polypellets is by far nor the only company where mutual trust between business partners has suffered during the corona crisis. Numerous suppliers and buyers have have had similar similar experiences. It is irrelevant that none of the business partners can be clearly blamed for the disruptions in the supply chain or other problems as the pandemic is a case of force majeure. This is shown by research by Professor Lutz Kaufmann and Dr. Jens Esslinger from WHU - Otto Beisheim School of Management. The study examined business relationships that were disrupted by crises even before Corona - for example, when partners were confronted with project delays, budget cuts, or delivery bottlenecks. The result was surprising, even for the researchers. For sometimes these disturbances were caused by one of the partners but sometimes also by force majeure. But no matter what caused the external shock, surprisingly, the loss of trust was alike in both cases.
Thus, the findings of the study can be directly applied to disruptions in business relationships caused by the corona crisis. On this basis, the negotiation and procurement experts Professor Lutz Kaufmann and Professor Felix Reimann from WHU provide valuable information on how business partners can rebuild trust during and after the crisis and perhaps even use the situation to their advantage:
Good relationships do not prevent from disappointment
Having established a trusting relationship with your buyer or supplier, respectively, does not protect against great disappointment and the necessity to reassess you business relationship in the event of a crisis. Quite the contrary: the greater the trust was before the disruption in the supply chain, the greater the loss of trust will be afterwards. Business partners tend to take disruptions personally and react extremely sensitively. This is also surprising, since one would assume that a strong basis of trust promotes goodwill and mutual understanding. For business partners this implies that well-considered words and intensive communication are necessary to avoid damage to the business relationship, especially when dealing with long-standing partners. If a loss of trust occurs, it requires particularly great efforts to restore it.
Be more considerate to your partners
In negotiating, you have to make sure to leave your partner sufficient air to breathe. Very few can afford to give their suppliers anything for free. But customers’ demands should be realistic and fact-based in order not to jeopardize the supply chain. It is like when you hold a bird in vour hand. On the one hand, you have to be careful not to let it fly away, on the other hand, you must not squeeze it too tightly. "Whereas exerting pressure in a relationship between customers and suppliers is counterproductive a good preparation of negotiations and a profound knowledge of the market are all the more important in times of crisis," confirms Dominik Steffani. He is a procurement expert at the Boston Consulting Group (BCG) with ample experience in such situations and refers to the example of the granulate manufacturer Polypellets. "The demands of the car manufacturers for price reductions are comprehensible because of suppliers’ cost advantages resulting from lower raw material prices. But if this leads to exerting pressure on the supplier beyond his actual capabilities, this will cause an irreversible erosion of the basis of trust for the future. In addition, a liquidity crisis may occur putting the supply at risk."
Apologizing is not enough
Kaufmann and Reimann also found that a mere apology will not rebuild trust completely. Substantial monetary or other compensation is needed to appease the partner. Financial incentives are just one possibility. Another possible compensation is the future participation in a joint innovation project or access to other suppliers of the customer for exchange. This may also generate added value and mutual trust. It is important that both sides feel that they have mastered the crisis hand in hand.
Do not ask for financial compensation right away!
But the negotiation experts also give a clear warning: If you manage to help your business partner getting through the crisis, you should not immediately demand financial compensation for it. This would destroy the gained trust right away again. There are other, cleverer ways to take advantage of the "relationship capital" that has been built up. It is often much more appropriate to discuss the further development of the business together. An intact basis of trust will make it much easier to convince the business partner to invest substantially in joint projects.
The crisis as an opportunity
Winston Churchill once recommended, "Never let a good crisis go to waste." And as a matter of fact, for some, a disruption in the supply chain can also be an opportunity. Because in an exceptional situation, a bad business relationship can sometimes be turned into a good one. Through negotiating intelligently and considering the needs of the partner, a new basis of trust can be built to the benefit of both sides, even beyond the crisis. "There is a good chance that this will be possible now after corona, especially because of the special features of the lockdown," says Dominik Steffani of BCG. "All economic sectors are affected alike, there is a high degree of willingness to cooperate in order to overcome the situation together. This willingness will continue to exist after the crisis.”
The corona crisis can also be understood as a test for the quality of a business relationship as it reveals where the real loyalties lie. The decisive factor is usually the personal relationship that has developed between representatives of two companies. It has proven to be worthwhile to cultivate such relationships carefully and not to disrupt them due to a false understanding of compliance. After all, when a crisis like the corona pandemic leads to a shortage of resources due to disruptions in the supply chain, companies often need to prioritize their suppliers or customers. The researchers found that it is mainly the resilience of the business relationship which is decisive when it comes to remaining loyal to a partner.
In case of the automotive supplier Polypellets, the researchers recommend that, with regard to the falling crude oil prices, the customer demands a moderate price reduction from his supplier. In order to have a reasonable basis for negotiation, buyers should generally be well informed and be able to realistically assess the economic strength, cost structure, and profit margin of the business partner. Claiming exaggerated price reductions could rapidly endanger the financial stability of the supplier and therefore endanger the supply itself. It may also reduce the supplier’s motivation to make future investments. Polypellets, for its part, should not just give its customer a financial incentive for strengthening further cooperation. Rather, both business partners should immediately invest in new joint projects in order to benefit from the upswing after the crisis - or to be better prepared for the next one.
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What the negotiation experts advise:
- Even if it is force majeure that disrupts the supply chain, communicate with empathy and understanding for your business partner! The cause of the external shock is irrelevant for the loss of trust.
- Remember that just an apology is not enough to rebuild trust! Additional financial incentives or partizipating in joint projects can rebuild trust.
- If you have to prioritize business partners due to a crisis, do not assume that the most long-standing business partners will be the most lenient. Probably the opposite is true!
- Start negotiations with a profound knowledge of the current situation and the future possibilities of your business partner!
- Do not use your power bluntly but make clever demands!
- Do not leave any crisis unused! It provides opportunities to turn bad business relationships into good ones.
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Original study:
Kaufmann, L./Esslinger, J. (2018): Toward Relationship Resilience: Managing Buyer-Induced Breaches of Psychological Contracts During Joint Buyer-Supplier Projects, in: Journal of Supply Chain Management, Vol. 54 (4)
Further reading:
Esslinger, J./ Kaufmann L. / Eckerd S. / Carter C. (2019): Capitalizing on the Unexpected, in: Supply Chain Management Review, Vol. 2/2019
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The WHU experts:
Professor Lutz Kaufmann
Professor Lutz Kaufmann is an expert on business negotiations at WHU – Otto Beisheim School of Management. His studies focus on empirical research of procurement strategies and B2B negotiations. In terms of supply chain management, WHU is among the ten best research institutions worldwide.
Professor Felix Reimann
Professor Felix Reimann is an expert on suppliers’ relations and B2B negotiations at WHU – Otto Beisheim School of Management. His main research fields are power and cooperation in business relations, and cooperation with suppliers in emerging markets. Reimann emphasizes the global orientation of the business school and has access to a far-reaching network of companies and institutions, especially in Asia.
Dominik Steffani
Dominik Steffani is a member of The Boston Consulting Group’s procurement practice leadership team for Europe, the Middle East, and Africa. He has gathered extensive consultancy experience in global transformation projects with regard to procurement. His expertise comprises the areas Europe, Asia, and USA as well as the branches automotive industry, consumer goods, banks, and utilities.