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Introduction
Global crises significantly influence various aspects of business, including production, distribution, sales, and stakeholder relationships. COVID-19 pandemic that is currently affecting most countries of the world has changed the reality for many companies in a variety of industry sectors, introducing unprecedented issues. One of these is interruptions in production or service delivery due to supply chain issues. Lockdowns imposed by governments affected the ability of many suppliers to deliver materials, causing delays and shortages. Consequently, many companies suffered performance and profitability losses due to not having an opportunity to continue serving customers. Demand for suppliers who are still capable of delivering materials and parts amid a pandemic is very high, and they can be tempted to set higher prices or reject some clients. Negotiation strategies can assist businesses in building and maintaining relationships with suppliers amid a pandemic.
Background
The 2020 coronavirus pandemic has shaken the entire business world since it began earlier this year. The virus first surfaced at the end of 2019 in Wuhan, China (Taylor, 2020). On 31 December 2019, the Chinese government confirmed that some people in the area were being treated for pneumonia caused by a new virus (Taylor, 2020). It was still unknown whether humans could spread this virus, and Wuhan was not closed off from the rest of the country until late January, contributing to the fast growth in the number of people infected (Taylor, 2020). As the outbreak occurred during the holiday season, when many people travel, the virus spread quickly to other areas in China, Asia, Europe, and the Americas.
Soon, it became evident to global and local authorities that the virus had significant pandemic potential. The World Health Organization officially declared the virus a global health emergency at the end of January, when thousands of people were already infected, and dozens died from complications (Taylor, 2020). Travel to and from China was restricted to prevent further development of the problem, but the virus was highly contagious, and so the number of new cases grew each day. Iran and Italy saw a significant increase in the number of cases and deaths, and travel in Europe and the Middle East was also halted by governments efforts to contain COVID-19.
As part of measures to prevent further disease spread, many countries introduced lockdowns designed to keep people from contracting the virus. Although the specifics of these regulations varied considerably between countries, in many locations, non-essential businesses were closed temporarily, and people were required to avoid leaving their homes except for urgent matters, such as going to the pharmacy or purchasing groceries (Taylor, 2019). These efforts likely contributed to the fight against COVID-19 but did not end the pandemic. At the moment, the total number of cases reaches nearly 12 billion, with more than 540,000 people dead in 177 affected countries (Taylor, 2019). Lockdown measures have already been lifted in most states, but people are still wary of the disease. Furthermore, the pandemic had devastating on businesses and led to many significant problems and obstacles.
Impact of COVID-19 on Supply Chains
One of the most significant problems the pandemic brought for businesses was the disruption of supply chains on both local and global levels. According to Fernandes (2020), the virus affected supply networks worldwide, which contributed to its adverse effects on the economy. There are several ways in which this effect came into existence.
First of all, travel restrictions created issues for international supply networks. For instance, many businesses today purchase materials or parts from suppliers in other countries. However, the coronavirus outbreak affected their ability to do so by prompting governments to impose travel restrictions (Ding et al., 2020; Taylor, 2020). As a result, some businesses could not produce goods or deliver services if the materials they needed were sourced from outside of their home country. Travel bans also affected companies that were developing their supplier networks internationally by delaying negotiations and contracts (Ding et al., 2020). In this way, the efforts of different world governments designed to prevent further escalation of the situation worsened businesses access to their existent or prospective suppliers.
Secondly, lockdown measures that were imposed in many countries also stopped manufacturing operations. This was particularly relevant for companies that source parts from their suppliers rather than raw materials. For example, in the car industry, many production plants could not manufacture vehicles due to the lack of parts (Fernandes, 2020). According to scholars, this is happening in most industrial sectors. Even in luxury goods, like Swiss watches, manufacturers are facing disrupted supplies of components (Fernandes, 2020, p. 13). The adverse effects of lockdowns on suppliers were thus prominent and influenced supply chains in all industry sectors.
Another important mechanism by which the coronavirus pandemic affected supply chains globally is financial. Researchers state that operational disruptions caused by the pandemic affected the profitability of a wide variety of businesses (Fernandes, 2020; Ivanov & Dolgui, 2020; Ivanov, 2020; Ivanov & Das, 2020). Moreover, lockdowns affected the demand for non-essential goods in the general population. As a result of these factors, suppliers also face difficulties in re-establishing their operations and agreeing with clients on prices since their ability to cover costs of operations and logistics has decreased.
These forces have contributed to current issues in supply chain management, causing difficulties both for businesses and for their suppliers. The adverse consequences are likely to be significant and long-lasting. For example, Fernandes (2020) states that 75% of companies in the United States reported disruptions in their supply chains. This, in turn, has increased the costs of manufacturing in most industries, from food to luxury accessories: As factories shut down in China and transportation routes collapse, it has been increasingly difficult for a company like Hasbro to get its products to market (Fernandes, 2020, p. 13). Nevertheless, it is also essential to understand the impact that the pandemic had on supply chain management in the general sense. Topics like supply chain resilience have become particularly prominent because, for years, most businesses focused on the efficiency of their supply chains rather than on emergency planning and management (Fernandes, 2020; Ivanov & Dolgui, 2020; Ivanov, 2020; Ivanov & Das, 2020). For instance, in the current situation, the just-in-time strategy that companies often relied on to decrease their costs has become irrelevant and even harmed businesses (Fernandes, 2020). Thus, the impact of the pandemic was instrumental not only to individual companies but for supply chain management practice in general.
Issues in Procurement and Supply Chain Management
In order to explore and explain how negotiation strategies can support businesses in these difficult times, it is essential to highlight current problems in procurement and supply chain management. The main issue that was caused by the coronavirus was access to suppliers and their goods (Fernandes, 2020; Ivanov & Dolgui, 2020; Ivanov, 2020; Ivanov & Das, 2020). Being cut off from their sources of parts or materials, companies faced manufacturing disruptions and financial losses, as explained above. In procurement, companies have also lost access to potential partners both locally and internationally due to lockdowns and travel bans; this halted supplier relations and procurement efforts in a variety of industry sectors.
The second important issue that should be taken into account is that, as businesses lost access to their existing suppliers, the demand for materials and parts surged significantly. In order to limit the financial repercussions of the pandemic, it was crucial for companies to minimize disruptions to their production and service delivery (Fernandes, 2020). As a result, the bargaining power of suppliers who were minimally affected by the pandemic and could still provide parts or materials to partners increased substantially. The power of local suppliers who could fulfill international contracts lost to travel restrictions has increased accordingly. For instance, in the United States, many large companies that had supply chain networks across Asia were forced to seek replacements locally or source from countries not affected by travel bans (Fernandes, 2020). The increased bargaining power of suppliers has a negative effect on supply chain management as a whole since it allows suppliers to raise prices on goods that they deliver. Moreover, other conditions of contracts can also be affected, such as delivery times. Amid a pandemic, companies will have to accept worse terms than they enjoyed before this health crisis in order to avoid further financial and performance losses.
The third issue in procurement that should be addressed in the current context concerns the quality or types of goods that companies can now source. Before the pandemic, businesses could generally choose the types of materials or parts that they needed to source and had more options. Since only a limited number of suppliers are available now, companies might face new difficulties in finding the right materials for their products or services. As a result, they could be forced to work with several suppliers rather than with one or accept materials of low quality in order to be able to serve customers. This is a crucial problem that also affects various businesses, regardless of their size or industry sector.
The Need for Negotiation Strategies
As examined in the previous sections, modern companies face a wide array of problems related to supply chain management and procurement as a result of the COVID-19 pandemic. These difficulties can have various negative effects, ranging from significant financial losses due to being unable to produce and deliver products to customers to decreased customer satisfaction due to the reduced quality of materials used in manufacturing. These problems are nearly universal in their scope; even companies that had well-developed supply chains before the pandemic are facing these problems now. While making changes to the design of supply chains and making them more resilient is essential to avoid similar issues in the future, companies also need short-term strategies that can assist in overcoming procurement and supply chain barriers while the pandemic is in full swing. In particular, these strategies should seek to address the increased power of suppliers in the current situation, as this would help businesses to negotiate better contracts with suppliers who are still available and can deliver uninterrupted service.
The process of negotiating is integral to business since companies have to establish ties with suppliers, distributors, and many other actors. Negotiation is thus a crucial aspect of purchasing and acquisitions management. When executed correctly, this process supports win-win agreements between businesses and their suppliers. As explored by Geiger (2017), negotiations in procurement help to fulfill two goals. On the one hand, they safeguard the negotiation process, thus ensuring that the buyer and the supplier will sign a contract. On the other hand, they assist companies in achieving tactical advantages (Geiger, 2017). Without negotiation, businesses would simply accept or deny suppliers initial proposal without attempting to change it in their favor. Applying negotiation strategies could help companies to overcome the increased power of suppliers, thus allowing them to negotiate better prices, short deliveries, and other aspects of supplier contracts. Therefore, negotiation strategies can be useful in procurement amid a pandemic as they could assist businesses in reducing expenses and interruptions in their operations, leading to improved resilience to the global emergency.
Better Prices
The primary issue that negotiations can assist with is supplier pricing. When the demand for similar parts or subassemblies rises, suppliers are commonly tempted to contract with the highest bidder, causing companies who need the same parts or materials to spend more than they would do under normal circumstances. If companies agree with the high prices set by suppliers without negotiating, they increase the costs of production, which decreases profitability. The correct application of negotiation strategies, on the contrary, can help businesses to avoid or minimize the increase in supply costs amid a pandemic. Research shows that the frameworks and models that underpin negotiation strategies can be applied successfully to obtain better prices (Leu et al., 2015). As a result, businesses can use them to gain access to high-quality parts or subassemblies without paying more during a pandemic. This, in turn, prevents further increases in operational and production costs, making companies more profitable and increasing their survivability amidst COVID-19.
Increased Bargaining Power
In relationships between businesses and their partners, bargaining power is of utmost importance. Relationships where there is a significant imbalance in power typically deliver different benefits to the two sides (OBrien, 2016). For instance, when a buyer has significantly more power than their supplier, their deal would be worse for the latter, and vice versa. In procurement, the balance of power depends on a variety of factors concerning the two sides and their offers. As noted by OBrien (2016), suppliers power is the greatest when they have a unique or scarce offer that several buyers would be willing to compete for. In this case, the high bargaining power allows suppliers to change contract conditions in their favor, both in terms of price and in relation to other parts of the agreement. The deal that the supplier agrees on, in this case, might be unfavorable for the buyer, but having no other options would still require them to consider it and, possibly, agree on the conditions.
The effects that the pandemic had on supply chains of various companies and on the industry as a whole left a lot of suppliers inaccessible to businesses. Given the decreased competition and the lack of alternatives, the offers of many suppliers became unique and highly desirable, leaving them with higher bargaining power than ever before. However, negotiation strategies can help companies to overcome this problem in procurement. The focus of many negotiation models and frameworks is on the power dynamics that characterize a relationship, and negotiation theory offers ways of increasing the buyers power (OBrien, 2016). As a result of applying these strategies, companies can avoid unfavorable conditions in their new procurement contracts and negotiate benefits that would support their operations during the pandemic.
Access to Reliable Suppliers
The changes caused by the pandemic have influenced not only the suppliers power to negotiate better conditions for themselves but also the access to reliable suppliers in general. With a limited number of suppliers currently available to companies operating in a specific industry and location, the demand might become higher than suppliers are willing to produce. As a result, many companies would have to opt for inexperienced or unreliable suppliers and face delays or decreased product quality. Approaching reliable suppliers in the right way and negotiating with them could help companies to solve this problem. For example, the company could use negotiation strategies to attract a particular supplier with better contract conditions than offered by its competitors, thus earning a valuable advantage (OBrien, 2016). The company could also use negotiation to influence the decisions of suppliers who are in high demand in relation to their buyer choices (OBrien, 2016). In this way, the use of negotiation strategies could help companies to avoid dealing with less professional and reliable suppliers.
Improved Relationships with Suppliers
One of the most crucial lessons that the pandemic taught businesses is that it is vital to develop and maintain relationships with reliable partners to avoid further interruptions during a crisis. While it might seem that negotiation strategies are aimed at obtaining benefits for one side, the reality is that they can also help to improve relationships with suppliers. This is very important to procurement as long-term collaborations contribute to the quality and efficiency of supplier networks of a company and allow limiting the risks associated with new suppliers. OBrien (2016) notes that long-term relationships in procurement depend on the value that both players obtain from this relationship. Negotiation, in this case, can help companies to find ways of creating or claiming value, thus getting similar levels of benefits from an agreement and avoiding win-lose contracts (OBrien, 2016). By utilizing negotiation strategies appropriately and consistently, companies can not only ensure that they yield valuable advantages from the deal but also develop long-term cooperation with reliable suppliers who could help them to grow in the future after the pandemic.
Reduced Service or Production Interruptions
Amid a pandemic, companies all over the world experience service and production interruptions due to lockdowns and other restrictions. When suppliers are unable to deliver materials, parts, or subassemblies without delays or disturbances, manufacturers experience losses due to lost outputs and operational time. These losses add to other problems caused by the pandemic and damage businesses further. Hence, avoiding service and production interruptions is crucial to survivability in the current economy. Negotiation strategies can be applied by companies in procurement to settle contract terms regarding delivery times, risk of delays, safeguards against interruptions, compensation for lost production time, and related factors that impact the continuity of service and the adverse effects of disruptions (OBrien, 2016). Consequently, businesses can enjoy reduced service and production interruptions while also avoiding losses due to unforeseen circumstances.
Competitive Advantage
In the current environment, businesses ability to negotiate with suppliers is a significant source of their competitive advantage. Procurement allows companies to establish collaborations that can support the delivery of products and services to the market faster and more efficiently. This, in turn, has a direct impact on the companys competitiveness. On the one hand, by reducing the expenses associated with procurement and supply chain management, companies save finances that can be reinvested to increase the quantity or quality of goods produced, growing their market share. On the other hand, avoiding delays in production and distribution also distinguishes businesses from competitors during difficult times, as customers can only purchase what they can access. Managing supply chains effectively while also applying negotiation strategies to agree on the best terms for procurement can thus bring financial and market advantages to companies during a crisis.
Supply Chain Resilience and Viability
As explained in the previous sections, the pandemic has caused a shift in supply chain management theory from efficiency and speed to resilience. When faced with a global health threat and opposed by governments efforts to contain the outbreaks, many supplier networks collapsed regardless of their past efficiency (Fernandes, 2020). On the global level, 94% of large companies faced disruptions in their supply chains (Ivanov & Dolgui, 2020). While it is possible that the situation will improve once the pandemic is over, failing to develop supply chain resilience and viability, this time puts companies at risk of suffering during future emergencies. According to Ivanov and Dolgui (2020), the viability of a supply chain determines its ability to meet the demands of surviving in a changing environment (p. 3). Supply chain resilience is a more general term used to denote its readiness for emergencies, the ability to function under unexpected circumstances, and the capacity to restore original performance as quickly as possible after the risk passes (Ivanov & Dolgui, 2020).
While efficiency and agility affect supply chain performance under normal circumstances, resilience and viability are crucial for businesses to survive emergencies and crises. By supporting businesses in agreeing on better contract conditions, accessing reliable, high-quality suppliers, and improving relationships with them, negotiation strategies also help the development supply chains resilience and viability. Consequently, their use by businesses is essential both during a pandemic and after it to enhance the companys readiness for unforeseen situations in the future.
Conclusion
Overall, the coronavirus pandemic has inflicted significant damage on the supply chains of many companies through travel restrictions, lockdowns, and other measures that governments of the affected countries used to contain the outbreak. Under these circumstances, successful procurement relies on negotiation strategies to access reliable suppliers, correct power imbalance, and agree on conditions that benefit both parties. The use of various negotiation strategies can help businesses to reduce losses and service interruptions during a pandemic, thus offering a significant competitive advantage. Furthermore, negotiation strategies support the formation of long-term relationships between buyers and suppliers, which is instrumental in building viable and resilient supply chains that could withstand future crises.
References
Ding, W., Levine, R., Lin, C., & Xie, W. (2020). Corporate immunity to the COVID-19 pandemic. National Bureau of Economic Research. Web.
Geiger, I. (2017). A model of negotiation issuebased tactics in business-to-business sales negotiations. Industrial Marketing Management, 64, 91-106.
Ivanov, D., & Das, A. (2020). Coronavirus (COVID-19/SARS-CoV-2) and supply chain resilience: A research note. International Journal of Integrated Supply Management, 13(1), 90-102.
Ivanov, D., & Dolgui, A. (2020). Viability of intertwined supply networks: Extending the supply chain resilience angles towards survivability. A position paper motivated by COVID-19 outbreak. International Journal of Production Research, 58(10), 2904-2915.
Ivanov, D. (2020). Predicting the impacts of epidemic outbreaks on global supply chains: A simulation-based analysis on the coronavirus outbreak (COVID-19/SARS-CoV-2) case. Transportation Research Part E: Logistics and Transportation Review, 136, 101922.
Leu, S. S., Son, P. V. H., & Nhung, P. T. H. (2015). Optimize negotiation price in construction procurement using Bayesian Fuzzy Game Model. KSCE Journal of Civil Engineering, 19(6), 1566-1572.
OBrien, J. (2016). Negotiation for procurement professionals (2nd ed.). Kogan Page Limited.
Taylor, D. B. (2020). A timeline of the coronavirus pandemic. The New York Times. Web.
Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. SSRN. Web.
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