Adapted from “Handle with Care: Negotiating Strategic Alliances,” by Lawrence Susskind (professor, Massachusetts Institute of Technology), first published in the Negotiation newsletter.
Some business partnerships are more important than others. This is especially true in supply chains, where producers of key components can be irreplaceable.
Consider the relationship between two hypothetical companies, Brattlebury Corporation, which manufactures computers and peripherals, and Viatec, the company that supplies the plastic ink cartridges for Brattlebury’s ink-jet printers. The companies’ 10-year relationship has been a boon to both sides. For the past five years, the annual value of their contract has averaged $30 million. But Brattlebury’s overall sales recently have been flatter than expected. In addition, a survey revealed that many of Brattlebury’s suppliers have grown dissatisfied with the company’s periodic requests for proposals (RFPs). Negotiating a proposal every two years was costing everyone time and money.
So Brattlebury’s management resolved to explore cost-cutting measures with its strategic partners, those companies that, like Viatec, provided crucial goods. These suppliers could not be replaced readily, and their goodwill was crucial to meeting short-term corporate objectives.
Such relationships require special care and handling. During negotiations with a highly valued partner, negotiators must balance the need to get the lowest price possible and the need to maintain and enhance the alliance. Even if your company is not deeply embedded in a supply chain, you probably face ongoing negotiations with partners whose trust you want to preserve for strategic reasons.
To signal their commitment to maintaining their long-term strategic relationship, negotiators need to listen carefully to one another’s thoughts and feelings. This means meeting regularly to probe interests.
After identifying Viatec as a strategic partner, Brattlebury decided to present the supplier with the following proposal: a longer-term contract in exchange for 5% annual cost reductions. In addition, Brattlebury promised to collaborate on finding creative ways to enable these cost cuts, such as changing its specifications and requirements.
In meetings over the course of several months, representatives from Brattlebury and Viatec identified four potential ways to lower costs:
- For the cartridges, Viatec could switch to a plastic that is considerably cheaper to source but that carries a slightly higher defect rate.
- Currently, Viatec produces three different designs for Brattlebury’s various printer lines. Brattlebury could change its specifications so that Viatec need produce only one design.
- Brattlebury could agree to minimum and maximum delivery quantities each quarter. This would prevent Viatec from having to lay off employees during slow periods and hire and train them during peak times.
- Viatec could save money by doing fewer quality-control checks at its plant if Brattlebury were willing to take on more liability for product defects.
After identifying possible moves that would be beneficial to both partners, each side should work independently to assess its actual costs and the savings associated with each proposed change. Keep in mind that everyone’s interests change in response to the unique opportunities and pressures they experience, both internal and external. Through regularly scheduled meetings, strategic partners can stay closely attuned to each other’s shifting interests and explore unexpected yet mutually advantageous opportunities.