Many industries have been hit hard by the COVID-19 crisis, <s class="msoDel"> </s>supply chains were disrupted and many collapsed completely. Although the cause was beyond the suppliers’ control, relationships between business partners suffered severely. Conversely, buyers snubbed their longtime suppliers through aggressive demands for cost reduction and further flexibility. In these trying times, it is important for both parties to react appropriately. WHU - Otto Beisheim School of Management research results demonstrate how this can be achieved and which mistakes should be avoided at all costs.
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? He is well aware of 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 COVID-19 crisis. The manufacturer of interior components for cars, to whom Polypellets supplies plastic granulate, is now demanding that Polypellets pass on the lower material prices to their customers. Simon H. considers this demand to be particularly brazen as Polypellets, classified as a medium-sized company, urgently needs the temporary additional margin in order to control its own liquidityissues. After all, Polypellets has done everything in its power to be able to continue supplying to its customers. It truly speaks to the extensive nature of the challenges brought on by the pandemic that long-time business partners are treating each other in this manner.
Even if no one is to blame, there is an inevitable and marked loss of trust
Polypellets is decidedly not the only company in which mutual trust between business partners has suffered at the hands of the COVID-19 crisis. Numerous buyers and suppliers have experienced similar situations. That none of the business partners involved can be legitimately blamed for the disruptions in the supply chain or myriad other difficulties is seemingly irrelevant as the pandemic is, in all senses of the phrase, a force majeure which itself cannot receive blame and therefore allows struggling businesses to play the role of scapegoat. Research completed by Professor Lutz Kaufmann and Dr. Jens Esslinger from WHU - Otto Beisheim School of Management proves this theory. The study examines business relationships that were disrupted by crises outside the realm of COVID-19 - for example, when partners were confronted with project delays, budget cuts, or delivery bottlenecks. The result was surprising, even for researchers: regardless of whether these shocks were caused by individual factors or force majeure, the degree to which trust was lost was surprisingly alike in both cases.
Thus, the findings of the study can be directly applied to disruptions in business relationships caused by the COVID-19 crisis. On this basis, WHU negotiation and procurement experts Professor Lutz Kaufmann and Professor Felix Reimann provide valuable insight into how business partners might rebuild trust during and after the crisis, and perhaps even how to use the situation to their advantage:
Good relationships do not prevent disappointment
Having established a trusting relationship with your respective buyer or supplier does not necessarily protect against great disappointment and the need to reassess your business relationship in the event of a crisis. Quite the contrary: the greater the level of trust before the disruption in the supply chain, the greater the subsequent loss of trust. Business partners tend to take disruptions personally and react extremely sensitively, which is surprising as one would assume that a strong foundation of trust would promote mutual understanding. For business partners, this necessitates extensive forethought regarding word-choice and decison-making, and intensive communication so as to avoid damage to the business relationship, especially when dealing with long-standing partners. If a loss of trust occurs, it requires particularly valiant efforts to restore it.
Be more considerate to your partners
In negotiating, you must be sure to leave your partner sufficient air to breathe. Very few can afford to give their suppliers something for nothing, but customers’ demands should be realistic and fact-based in order to avoid jeopardizing the efficacy and overall existence of the supply chain. In essence, it is like when you hold a bird in your hand: of course, you must be careful not to let it fly away, however you must also be sure not to squeeze it too tightly. "Whereas exerting pressure in a relationship between customers and suppliers is counterproductive, high quality negotiation preparation and a profound knowledge of the market are all the more important in times of crisis," confirms Dominik Steffani. A procurement expert at the Boston Consulting Group (BCG) with ample experience in such situations, he refers here to the example of the granulate manufacturer Polypellets, stating that "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 the exertion of pressure on the supplier beyond its actual capabilities, this will cause an irreversible erosion of trust for the future. Additionally, a liquidity crisis may subsequently occur, thereby endangering supply."
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, however financial incentives are just one possibility. Another potential form of compensation is the offer of future participation in a joint innovation project or access to the customer's other suppliers, which may also generate added value and mutual trust. It is integral that both sides feel they have overcome the crisis together.
Do not request financial compensation right away!
The negotiation experts give a clear warning: If you do manage to help your business partner survive the crisis, you should by no means demand immediate financial compensation. This would accomplish nothing but the destruction of the trust you have just managed to build. There are other, cleverer ways to take advantage of the "relationship capital" that has been established. It is often much more appropriate to discuss the further development of the business together, as a strong foundation of trust will facilitate higher levels of cooperation and investment in joint projects.
The crisis as an opportunity
Winston Churchill once remarked that one should "never let a good crisis go to waste." In this vein and in this exceptional situation, a disruption in the supply chain can also be an opportunity for some, and a bad business relationship might be transformed into a good one in the face of crisis. Through strategic negotiation and careful consideration of the needs of the partner, a new symbiotic relationship built on trust can develop and extend beyond the crisis. "There is a good chance that this will be possible after COVID-19, especially because of the specific cicrumstances surrounding the lockdown," says Dominik Steffani of BCG. "All economic sectors are affected alike, so there exists a higher degree of willingness to cooperate in order to collectively overcome the situation. This willingness will continue to exist even after the crisis.”
The COVID-19 pandemic can also be viewed as a measure of the quality of a business relationship as it reveals where respective loyalties lie. The deciding factor is often the strength of the personal relationship between representatives of any given companies. It has proven to be worthwhile to cultivate such relationships meticulously and not to disrupt them over avoidable misunderstandings. When a crisis like that of the COVID-19 pandemic leads to a shortage of resources due to disruptions in the supply chain, companies must decide how to prioritize their customers and suppliers in order to survive. Research shows that it is primarily the resilience of the existing business relationship in question that determines its longevity and continued efficacy.
In the case of the automotive supplier Polypellets and the continuously falling crude oil prices, researchers recommend that the customer request a moderate price reduction from their supplier. In order to have a reasonable basis for negotiation, buyers should be well informed and able to realistically assess the economic strength, cost structure, and profit margin of their business partner. Demanding exaggerated price reductions could rapidly endanger the financial stability of the supplier and therefore the supply itself. It may also reduce the supplier’s motivation to make future investments. Polypellets, for its part, should not simply give its customers a financial incentive for strengthening further cooperation. Instead, both sides should invest in new joint projects in order to eventually benefit from the post-crisis upswing - or perhaps simply to be better prepared for the next one.
Tips for practitioners
- 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 has no bearing on the loss of trust.
- Remember that a simple apology is not enough to rebuild trust! Additional financial incentives or participation in joint projects can rebuild trust.
- If you have to prioritize business partners due to a crisis, do not assume that your most long-standing business partners will be the most lenient. Potentially the opposite is true!
- Start negotiations with a profound knowledge of the current situation and the future possibilities of your business partner!
- Do not brazenly take advantage of the power you hold, instead make clever demands!
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)
Esslinger, J./Kaufmann, L./Eckerd, S./Carter, C. (2019): Capitalizing on the Unexpected, in: Supply Chain Management Review, Vol. 2/2019
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 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.