Finding common ground
Here’s how to negotiate a solution when a supplier’s parts fail
By Christine McMahon, for SBT
Question: We have a contract with a high-profile client who has a tight timeline. To fulfill our agreement, we purchase a $200 product from a supplier and then upgrade it with about $1,700 worth of components. Our customer called to inform us that our product is failing. After an investigation, we discovered that one large batch of our supplier’s product was faulty. To maintain integrity and minimize liability, we recalled all products of that batch from our customer. Our contract with the supplier states that it is liable for its product only, which comes to $40,000. We estimate our costs to be $211,500 to resolve this. Any suggestions?
Answer: It’s obvious you are a company of integrity and care about your customer. Recalling the batch demonstrates your commitment to do the right thing.
Following are seven questions to help you work through the issues and prepare you for negotiating the appropriate terms of compensation with your supplier:
1) What’s important to you about this negotiation?
a. What do you need?
b. What do you want?
2) Who can help or hinder this negotiation?
3) What’s your BATNA – your best alternative to a negotiated agreement?
4) Where do you have leverage?
5) What are some viable options?
6) What concessions are you prepared to give and get?
7) How will you set the tone for this negotiation?
Now let’s work through your situation based on the information you provided.
1. What’s important to you about this negotiation?
Needs
Begin by asking yourself (or your team), “What do we need to happen as a result of this negotiation with our supplier?” A need is a “must have.” Some possible responses may include:
1) We need to maintain good relations. The supplier’s unique capabilities and competitive pricing are assets when we compete on larger contract opportunities. While we have other companies who can replace this supplier, we have a good working relationship and would like to continue to build on that.
2) We need for the supplier to take ownership of the damage that has resulted from its poor quality-control procedures.
Wants
The question you want to answer here is, “What do you want to happen as a result of this negotiation?” In other words, what is your ideal or desired outcome?
For example, your ideal situation would be for the supplier to write a check for the total amount you had to absorb in reproducing that total batch of products.
The supplier’s contract states it will cover your cost at $200/piece X 200 pieces = $40,000. However, you populated the product with $1,700 worth of parts. You expect 25% of the parts will need to be replaced at a cost of $425 per piece, totaling $85,000. Now add to that an additional $85,000 for the parts that had to be thrown away. There is also an estimated $1,000 charge to cover the compensation paid to employees who will disassemble the parts from the bad batch. And, finally, there is an additional $500 shipping-and-handling charge for the returned products.
In total, you project a $211,500 liability. What amount do you want the supplier to take responsibility for?
2. Who can help or hinder you in this negotiation?
The stakes involved require this situation be elevated to each company’s senior management level. These are the leaders who can authorize the amount you are asking for. This may include the CFO, president and CEO. Schedule a face-to-face meeting (if geographically possible) immediately. Time is of the essence as your credibility with your customer is at stake.
Additionally, contact the vendor who is supplying you with the part that had to be replaced. Describe your circumstances. Ask if the supplier would be willing to provide you with a one-time at-cost rate plus shipping and handling for the replacement parts. That may lower your liability.
3. What is your best alternative to a negotiated agreement (BATNA)?
Your BATNA is your best alternative if a negotiated agreement cannot be reached. In other words, what are your plans if a mutually agreeable resolution cannot be reached?
Let’s say your supplier’s equipment is faulty and cannot be fixed in time to meet your customer’s deadline. What is your backup plan? How then do you assess damages?
Or, what if the supplier refuses to compensate you beyond the $40,000 cost of its product? Will you terminate your relationship with that supplier and seek litigation? Or will you find a way to work through the obligations of this contract so you do not compromise your customer? If so, under what conditions?
4. Where do you have leverage?
What percentage of your supplier’s business do you represent? Would it experience a financial hardship if you moved your entire business to another company?
Is there someone in your company who has a long-standing relationship with the supplier’s CEO/president who can put the “cards on the table” and talk through the tough issues without causing defensiveness or hostility?
You have strategic advantage when you are able to walk away and let the negotiation fail. When you have another supplier who can meet your product specifications within your timeline, you have a viable option to move on.
However, if your current supplier has unique capabilities, while you may expect the supplier to do the right thing, you may be landlocked in your ability to negotiate the total amount of the damages.
5. What viable options exist?
Always enter a negotiation with several options. Based on the supplier’s offer, you have additional options you are able to explore.
Here are the most obvious options:
a. Accept the terms of the contract (pay $40,000) and bite the bullet on the damage charges.
b. Accept the terms of the contract and negotiate some or all of the additional charges. This might include your requesting the supplier write you a check upfront for the total estimated damages $211,500, and then, based on your actual expenses, repaying the difference.
c. Accept the terms of the contract and negotiate some or all of the additional charges. Based on the financial hardship the supplier may endure, develop a payment plan or negotiate lower terms for all future business to offset the damages charges incurred.
d. Accept the terms of the contract and terminate it immediately. Get a new supplier and absorb the incremental damage costs incurred.
6. What concessions are you willing to give and get?
Compare your responses to the needs and wants detailed above in question No. 1. The difference between the two is the room you have to make concessions.
For example, let’s say you decide your needs are to cover only your replacement part expenses. That represents $125,000, which includes $40,000 for the supplier’s original product and $85,000 for replacement parts. That is your walk-away point.
If you are unable to negotiate that amount, you flex your BATNA option.
On the other hand, your wants include all damages. That means the replacement parts, employee compensation, shipping and handling representing $211,500.
The difference between $211,500 and $125,000 is the room you have to make concessions. While you may prefer to have $86,500 in cash, you may find you need to look at other options, including negotiating lower costs or terms on future contracts or creating a payment plan that works for both parties.
7. How will you set the tone for the negotiation?
Tensions are high. People are anxious. $211,500 is a significant price to pay for a mistake. Some companies can weather the storm. For others, especially in this economy, this could mean a devastating financial hardship that maybe hard for the supplier to recover.
Opening the meeting/discussion with positive intent will help to relax everyone, including you. You might consider saying: “We recognize that this is not a situation of malicious intent on anyone’s behalf. It is something that occurred. And while we can identify and fix the cause so it is not repeated, damage has been done and we can’t ignore the facts. Our intent here today is to mutually define the damages and then determine how to resolve the liability. I know it’s not an easy thing when you look at some of these numbers, but we are two companies that share one thing in common, we both want to do the right thing to the extent that we are able. Our intent today is to open a dialogue with you. We want to examine the facts together, assess the damages, define what is appropriate compensation, and then determine how we work together going forward.”
How well do you maintain emotional discipline under pressure? During this meeting, you may encounter pressure points that trigger feelings of anger, hostility or defensiveness. Keep your cool. How you engage is as important as the words you use. When you feel your temperature rising, take a deep breath, pause and regain your emotional footing. This is not the time for blame-game tactics. Rather, it’s the time to be strategic and find common ground.
Be prepared. Give them the benefit of the doubt. Seek resolution, not annihilation.
Christine McMahon is the owner of Christine McMahon & Associates, a training and coaching firm in Milwaukee. She can be reached at 414-290-3344. Small Business Times readers who would like a negotiating situation addressed in this column can send a fax to 414-290-3330, or e-mail her at: ccm@christinemcmahon.com. Her column appears in every other issue of SBT.
