Supplier Remuneration – Sometimes You Just Have to Ask: Recouping Losses Due to Supplier Error Without Strong Contractual Protection
This is a true story about a supplier issue that led to a massive field return issue – but actually improved the relationship. “Why is this an issue?” you might ask. Well, not all supplier relationships are governed by strong, broad-based agreements. Sometimes, without appropriate coverage or protection, especially in a sole-sourced situation, you just have to ask for a remedy and hope for the best.
How did we get to this point?
The relationship between the supplier and us was solid. The companies worked together long before I arrived. For the most part, things were going well. However, the contract was not up to date and we were not properly protected from mishaps of the supplier.
We bought a specialized system from them to run part of our software. We installed these systems worldwide for our customers as a critical element of our overall solution. As with any purchasing environment, we tracked cost, quality, delivery, technology capability, and response to issues to judge performance. They performed very well.
Then, we discovered the issue.
It was not the type of problem that surfaced during the normal testing and evaluation. In fact, it was serendipitous that we found the issue at all. Once we discovered it, there was no turning back. Due to the nature of the problem, it was inevitable that at some point our customers would experience an unacceptable problem.
The cause of the problem was not the usual bad device or faulty manufacturing process or the rest of the list of hardware hiccups. The supplier had made a change in their manufacturing control system (MRP). During the translation from the old to the new system, the bill-of-material (BOM) got truncated and a number of components in the design never made it into the hardware. Despite that, all of the functional tests passed their processes and ours.
By the time we realized it, we were hundreds of systems, and a few million dollars, into shipments and field installations. Houston, we’ve got a problem.
We had to recall, replace, and repair the systems immediately – it was an “epidemic” situation. The challenge was that replacement had to occur first. We worked through those logistics to ship, replace, return, repair, and then re-ship. Fortunately, the systems were all very new and we could send repaired systems back out as new.
We began the dance to get the supplier to cover the recall and replacement costs. Back and forth between the procurement manager and the account executive at the supplier.
Of course, our CFO was breathing down my neck. “We never get compensated for anything from suppliers. How come we always bear the burden?” Mind you, the contractual situation was inherited.
Regardless, time to negotiate more intensely. I went back and forth with the account executive.
“Look, we did not cause this. In fact, we did nothing wrong. You shipped us bad stuff.”
“Yes, I know. But why should we pay for the overall recovery? We are not obligated. There’s no way our financial executives will allow me to commit anything. We will fix our mistake, but that is it.”
Time to escalate.
In the end we got our compensation
The escalation call was scheduled. The account exec told me not to expect a miracle or anything different from the financial executive.
The Cliffs Notes version went as follows.
“We have a major recall and repair problem. We are thankful that you are fixing the problems quickly and expediting new material to accelerate the entire process. However, we are spending a couple hundred thousand dollars to execute the entire process. Our customers cannot wait, so we must move fast. The personnel and shipment costs are not cheap.
“Please accommodate us by paying at least half. Thank you.”
Within 15 minutes of the call, the account executive called me back.
“You won’t believe this! Your request was so compelling, honest, and candid that the financial person agreed to compensate you. Congratulations. I never thought this was possible.”
It was even more fun walking down the hall to tell our CFO that we got half of the money back. He was equally ecstatic.
The negotiations and escalation could have gotten heated and hurt the relationship. We could have threatened legal action or changing suppliers. Both of these courses would incur a lot of opportunity cost and wasted effort.
Instead, we just asked and they said “yes.”
Michael A Massetti is a supply chain executive who has managed procurement, quality, supply chain planning, operations engineering, and more. He’s also “gotten the money” when suppliers go awry.