How to Change Suppliers Without Burning Bridges

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In recent years of crisis, shipowners have demonstrated what it means that ‘money spins where the drill won’t’. Due to shortages in Australia and New Zealand, local companies, as well as governments, have spared no expense to engage shipowners who were otherwise not available for transport to that part of the world. Thinking purely economically, or with profit in mind, the pupils of shipowners have turned into dollar signs $, just as we see in cartoons. It was even worth it for them to pay penalties for breaking existing contracts and turning towards Australia and New Zealand.

In this case, shipowners are service providers for cargo transport, but there are certainly situations when we must cancel a supplier for some reason, even at the cost of paying penalties. When we say ‘some reason’, it means that someone might buy us with an immoral offer by providing us with outrageously good contract terms, like those received by shipowners from New Zealanders and Australians, but besides such cases, various other situations may arise that will require such a drastic move.

The procurement manager at Modepack, Vesna Divjak, says that it can happen that the amount of damage, if the contract lasts until the end, is greater than the amount of the penalty. Although this is a different situation, the aim is still to operate profitably, i.e., to minimize damage. For example, as noted by the owner of the consulting firm Jakov Viktor Dragan Munjiza, one such situation is when a supplier does not deliver what they committed to.

Supply chain expert and owner of the consulting firm Logiko, Antonio Zrilić, emphasizes that in some situations it makes sense to terminate a contract with a supplier even at the cost of paying penalties, like what Munjiza said, i.e., if the supplier does not meet delivery deadlines or if the quality of their products or services is not at the previous level (or never was, although it was presented differently to the customer).

– In such cases, considering termination with penalty payment can be justified to maintain business continuity. Likewise, if a supplier shows serious financial difficulties that threaten their ability to fulfill obligations to you, terminating the contract with penalty payment can be a preventive step to reduce risk. There are also strategic reasons that can justify termination with penalties. Namely, if a company changes direction or strategy, it may happen that current suppliers are no longer the best. In such situations, considering termination with penalty payment may be necessary to achieve long-term goals, so the penalty cost due to termination of cooperation is actually part of the investment in a new strategy – explains Zrilić.

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We would add one more thing. In the aforementioned situation, when an entrepreneur ordered tomatoes from a supplier to produce ketchup, and it is a new one-year contract signed after tasting, then the entrepreneur is responsible for immediately signing a long-term contract instead of several that would last through several trial cycles. Or, as Munjiza says, one should also consider the trend of profitability and reliability of the supplier over a longer period in relation to the existing contract. However, even in such situations, paying penalties is a good lesson for future business. In fact, as the owner and director of the company Naše klasje, Zoran Šimunić, says, every procurement has three elements.

– Cooperation with a supplier is terminated when they ignore the customer in all three elements: quality and price, speed and accuracy, and ease of the procurement process. Then the cooperation should be terminated regardless of any penalties because the potential damage from remaining in such a relationship is much greater – explains Šimunić.

Of course, there are also situations where entrepreneurs are disappointed with suppliers, but it is not profitable for them to pay penalties, as noted by the owner of Applied Ceramics, Matt Darko Sertić. For example, when a company needs material that has been ordered long-term, and in that case, it is not profitable to terminate the contract and pay penalties and compensation. Ultimately, terminating cooperation with suppliers, even at the cost of paying penalties, is a last resort triggered by extraordinary situations such as a much better offer from another supplier or customer dissatisfaction. In fact, if an entrepreneur starts thinking about terminating cooperation, it should be done cautiously.

As Zrilić says, he always advises his clients to be cautious when terminating cooperation with a supplier, simply because this move requires careful consideration and analysis of various factors. After all, we would say, as in all other areas of human activity. We certainly will not discover hot water, but it is always worth reminding that quality communication is the mother of all good relationships, even when we are terminating cooperation with someone. As they say at Tokić, a company owned by Ilija Tokić that has over three hundred suppliers worldwide and rarely terminates cooperation, the company carefully and systematically establishes and builds relationships with suppliers, with dialogue as a key element. They hold the view that as long as there is quality two-way communication, it is almost impossible to reach a point of termination.

Therefore, ‘never slam the door on anyone’, as our elders say, and this is also believed by the CEO of Press Glass, Igor Vlahović, who says that communication with suppliers is the best tool for quality cooperation, but also for managing termination if there is no other way out. This is, he explains, extremely important because you never know if the cooperation will be renewed. Correctness in relationships, along with a transparent explanation of why the ‘divorce’ occurred, leaves the possibility for future cooperation.

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– Divorce is an expensive process in which no one wins and is very similar to the relationship between buyer and supplier. It is best not to completely terminate cooperation, but to introduce a competitive supplier while leaving minimal quantities with the current one. This tactic opens new possibilities while simultaneously retaining the option for renewed cooperation with the current supplier. If a complete termination of cooperation is unavoidable, it is extremely important to end it on correct terms – says Vlahović.

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