A member of the Buyer & Supplier Contracts Group on LinkedIn recently posted a very interesting question to the community:

In this Volatile market scenario is it ethical to renegotiate the existing contracts? Is this the only way to survive in the business?

In the current economic and credit climate, I’m sure a lot of companies are asking those questions. And I’m sure a lot more are not too worried about the ethics since they are simply trying to tread water.

While I think it’s a philosophical question that’s worth asking in a recession, I’m not sure those are the only questions that must be answered. In fact, for companies facing hard times or those worried about the financial health of their supply chain, I’d suggest a few other questions:

• Have you been honest with your buyers/suppliers about your financial situation? A little open dialogue and honesty can go a long way. If you’re a buyer in tough times, it may be worth discussing the situation with your strategic suppliers. Odds are good that they value your business and would feel some degree of financial pain themselves if you cut orders or in extreme cases…went under. So offering discounts or renegotiating terms may be a preferable to the alternatives.
• Are you collaborating with your suppliers to identify production/material changes that would save money? Tata Motors is the perfect example of a company that leveraged the innovation and expertise of their suppliers to drive down costs. Tata focused on defining functional needs rather than stringent part specs and in doing so, the creativity of their suppliers paid off. Perhaps your own suppliers have ideas on how you can improve your products AND lower costs.
• Have you considered supply chain finance options? Changing payment terms can be a win/win for both parties and alleviate a great deal of financial pressure. After all, many profitable companies are struggling right now due to a lack of liquidity, not a lack of customers or even profitability. So a supply chain finance option that helps suppliers receive payment sooner and provides a discount to the buyer helps everyone involved.

My point is…the best option isn’t always simply to renegotiate. Instead, bring something to the table that helps both parties - either from a visibility, collaboration or financial perspective.

Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.