Asian Journal of Management Cases

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TexItalia versus AZ Textiles: The Deadlock in Negotiations

Shehryar Khurshid, Salman Ghani Butt and Arif Nazir Butt Asian Journal of Management Cases 2004; 1; 161 DOI: 10.1177/097282010400100205 The online version of this article can be found at: http://ajc.sagepub.com/cgi/content/abstract/1/2/161

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ASIAN JOURNAL OF MANAGEMENT CASES, 1(2), 2004 SAGE PUBLICATIONS NEW DELHI/THOUSAND OAKS/LONDON

TEXITALIA VERSUS AZ TEXTILES: THE DEADLOCK IN NEGOTIATIONS

Shehryar Khurshid Salman Ghani Butt Arif Nazir Butt
This case covers the course of three-party negotiations through a business conflict between TexItalia, Italy; Creative Clothing and Textiles, Pakistan; and AZ Textiles, Pakistan. Creative Clothing and Textiles is a buying house acting as the middleman between AZ Textiles, a woven garment stitching unit, and TexItalia, its customer. The issue arises from quality problems and this case describes the discussions and tactics employed by the three parties during the negotiation stage including bluffs, threats and delaying. Keywords: Cross-cultural negotiation, mediation, multi-party conflict resolution, export marketing, textile industry

Iftikhar Khurshid was the Managing Director of Creative Clothing and Textiles, a textile buying house in Lahore, Pakistan. In March 2002, he was in his office in Lahore reflecting on a phone call he had just received regarding the deadlock in negotiations between his client TexItalia and his supplier AZ Textiles. One of the orders delivered to TexItalia had quality problems and TexItalia had raised a claim for the defects. To date, AZ Textiles had not paid the claim and as a result TexItalia had stopped placing further orders with AZ Textiles. Creative Clothing and Textiles represented TexItalias procurement interests in Pakistan. TexItalias denim business with AZ Textiles was a major source of revenue for Creative Clothing and Textiles and Khurshid was anxious to get the conflict resolved. Khurshid thought, Should I wind up the business and withdraw the profits or should I continue the business with no future orders in sight and finance the operations from the profit we have made? Should we have offered to pay TexItalias claim of US$ 30,000 ourselves? No matter how hard and honestly you work you are always vulnerable to a suppliers mistakes.

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INDUSTRY BACKGROUND
The textile industry was one of the most important sectors of the Pakistani economy, accounting for 67 per cent of exports, 38 per cent of employment and 27 per cent of value added by manufacturing. Due to scarcity of sound investment opportunities in other sectors, more and more textile units had been set up in Pakistan in recent years. The local market did not offer very high volume potential for quality garments with premium prices. Thus, exports were the primary source of revenue for virtually every Pakistani textile manufacturer. Competition was intense due to the large number of manufacturers. Despite sound production facilities and good manufacturing expertise, textile companies in Pakistan generally had weak marketing skills. Language barriers, geographical distance and lack of contacts in foreign markets all limited the extent to which a textile company in Pakistan could effectively market itself. Thus, textile manufacturers commonly appointed either agents or buying houses to handle the bulk of their marketing activities. A buying house served as a bridge between the customer (retailer/wholesaler) in the foreign market and the supplier (manufacturer) in the domestic market. The biggest advantage a buying house presented to customers was its physical proximity to the manufacturers. Since they were located close to the manufacturer, buying houses could monitor production more effectively. It was practically impossible and financially prohibitive for a customer to visit every manufacturer to oversee production and check the quality of products being manufactured. As competition in the foreign retail markets was intensifying and the focus on cost and quality was increasing, customers had started preferring working with buying houses. A buying house took care of the entire procurement process and functioned as the customers representative, ensuring that the customers requirements were met by the manufacturer. While the buying houses focused on satisfying the customers, they were also vital for the manufacturers as they marketed the manufacturers in the export markets to important customers. The steps involved in a typical order process and the buying houses role in it are now described. As soon as the customer sent an order inquiry, the buying house became involved. The first step was to coordinate sample development by the manufacturer and to ensure that the samples were developed according to customer specifications. Once samples were dispatched to the customer and were approved, the buying house followed up with the customer to finalize order details such as order size, delivery date, price, etc. Upon receipt of the order, the manufacturer signed a contract with the buying house which confirmed that the terms and conditions specified by the customer were acceptable. Once this was done, the customer opened a Letter of Credit (LC) in favour of the manufacturer. The LC ensured that the manufacturer would receive payment of goods as soon
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as all supporting documents (export bill, bill of landing, custom clearance, quality certificate from the buying house, etc.) confirming dispatch of goods of acceptable quality were submitted to the bank. Typical order lead time was sixty days from the date of opening of the LC. As soon as production began at the manufacturers end, the buying house started conducting routine quality checks to ensure that the production was according to the customers requirements. In addition, the buying house inspected and approved the fabric colour as well as accessories such as labels, zippers, buttons and price tickets. Once the goods were ready, the buying house conducted the final inspection where goods were checked randomly to ascertain their quality. The buying house submitted its quality report to the customer who decided, based on the report, whether to approve dispatch of goods or not. Once the goods had been dispatched, the buying house ensured that all relevant shipping documents were submitted by the manufacturer at the earliest. This ensured that the manufacturer received payment swiftly and allowed the customer to get the goods cleared promptly at the incoming port. Additionally, the buying house was available to follow up on any order related problems that either the customer or the supplier might have with respect to the consignment. Thus, the buying house was actively involved right from initial order inquiry till the time the customer was satisfied with the goods received.

Industry Norms Regarding Quality Problems

Despite the several quality checks done by the buying house before dispatch of goods, there was still a chance that the goods might be found defective. This was because it was not possible to check each and every garment and thus some defects might go unnoticed. In such cases, the buyer and supplier usually entered into negotiations for settlement of potential claims. The buying house played a key role in resolving the problem. According to Khurshid, A buying house represents the interests of both customers and manufacturers and can thus be very effective in resolving defect related problems. Due to customs restrictions in Pakistan as well as time constraints, it was not possible to send the faulty goods back to the manufacturer. Thus, the buying houses usually proposed that an independent third party inspection agency present in the customers country perform a quality check on the entire shipment. Based on the inspection results, the extent of damage could be gauged. If, for example, the inspection agency found 50 per cent of the goods to be faulty, the manufacturer paid 50 per cent of the value of the order back to the customer, either in the form of cash or as discounts offered on future orders. The cost of the audit was also borne by the manufacturer. Billing of these audits was done on an hourly basis and an audit on an average size order (US$ 30,000US$ 50,000) in Europe cost between US$ 2,000US$ 2,500. While these charges were high, they were still feasible considering
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the value of the shipment that might be lost due to the customers claim. It was typically advantageous to have a third party audit to verify the customers claim, since the customers evaluation of damages could be exaggerated.

BACKGROUND INFORMATION ON THE PARTIES INVOLVED

Creative Clothing and Textiles
After having worked for around thirteen years in the textile sector, Khurshid had resigned from his last job as Marketing Director of Legler Nafees Denim Mills to set up his own textile buying house, Creative Clothing and Textiles (CCT). Legler Nafees was a joint venture between the Nafees group in Pakistan and the Legler group in Italy. The companys annual revenues were roughly US$ 20 million. As Marketing Director, Khurshid handled fabric as well as garment sales. His job involved extensive travel to Canada, Egypt, France, Germany, Italy, Morocco, South Africa, Switzerland and the US. Khurshid marketed Legler Nafees latest product developments to prospective customers and coordinated development of new products at Legler Nafees that were requested by customers. He also ensured regular communication with customers, which was an essential ingredient of customer satisfaction. According to Khurshid, I had gathered significant experience in the field of textile marketing. I had established good relations with customers and agents and it was now time to capitalize on them. Working in Legler Nafees offered limited growth. There is a limit to which one can earn when working on a salary. On the other hand, a buying house, successfully run, can offer exponential growth and a much higher pay-off compared to a job in a company. CCT was formed in April 2000 in partnership with Mario Maldini, an Italian living in Rome. Maldini had vast experience in the textile sector and had represented various suppliers as their agent in the Italian market. His last assignment was with Legler Nafees Denim Mills as their exclusive agent for Italy (Exhibits 1 and 2 give information on the profiles of the companies and the players involved). Maldini primarily took care of the marketing side for CCT as he approached potential clients in Italy to generate business. Khurshid, on the other hand, worked to build a strong relationship with Pakistani manufacturers and was responsible for monitoring production and communicating with customers regarding progress of their orders. Typically, a buying house working in Pakistan specialized in one or two product lines, such as Matrix Sourcing and Indus, two buying houses in Pakistan which primarily dealt with knitwear products. CCT was one of the few buying houses which dealt with many product lines. Working in a few product lines was generally favoured in the industry as it allowed for specialization. However, CCT wanted to diversify into many product lines.
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The main reason for this was that Italian retailers tended to order different types of products for retail purposes. If they could coordinate all this business through one buying house, it would be ideal for them. If the customers had to work with multiple buying houses in the same supplier country, it would take them more time and effort. Thus, from the perspective of providing maximum value to its customers, CCT decided to work with many product lines hoping to attract customers. On the supply side, CCT had vowed to work with the best suppliers in Pakistan in order to give their customers the best quality of merchandise. The buying house worked with AZ Textiles in Lahore for woven garments, Chenab Textiles in Faisalabad for bedsheets, High Noon in Lahore for knitwear, Hala Enterprises in Lahore for towels and bathrobes and Chittagong Fashions in Bangladesh for dress shirts. Each company was considered to be amongst the top manufacturers in its respective industry. In March 2000, CCT approached TexItalia, an Italian retailer, to convince them to work with Pakistani suppliers. Maldini used his contacts to set up an initial meeting with TexItalia. A few months later, TexItalia sent its chief buyer, Alessandro Baresi to evaluate the production facilities for textile garments and home textiles in Pakistan and to assess the quality of manufactured products. Baresi was greatly impressed by the various suppliers he visited in Pakistan. In addition to the modern production facilities, he found a significant cost advantage in working with Pakistan. As an example, a pair of average denim jeans cost TexItalia roughly US$ 8 Free on Board (FOB) from Tunisia and Morocco. Shifting this business to Pakistan would save TexItalia almost US$ 3 per garment, a significant amount of cost saving. After his return to Italy, Baresi decided to place orders with certain textile manufacturers in Pakistan. CCT was appointed TexItalias official representative in Pakistan; it was agreed that the buying house would handle all orders in Pakistan. All orders had to be coordinated by it with the respective suppliers. From the initial sampling stage till the time goods landed in TexItalias warehouse, every step had to be monitored by CCT. It had taken roughly six months for the buying house to win the TexItalia account. CCT also approached various other customers in Italy, from whom it was able to acquire some small trial orders. However, these trial orders did not materialize into large repeat orders. According to Khurshid, It was extremely difficult to convince an Italian buyer to work in Pakistan. None of the customers we approached had worked in Pakistan and none of them carried a positive image of the country. Due to our proximity to Afghanistan and Iran, it was very difficult to convince the Italians that Pakistan was a safe country to do business in. The biggest challenge for us was to persuade the Italian customers to come and visit Pakistan to see the manufacturing facilities. However, TexItalia came and they were so impressed that they gave us substantial business early on. The other customers were not even willing to visit us. As a result, we became heavily dependent on TexItalias business.
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TexItalia accounted for roughly 80 per cent of CCTs total revenue. The buying house charged a 7 per cent commission on all orders, half of which was used to cover operating expenses. Whenever prices were quoted to customers, the suppliers included the 7 per cent commission for CCT in their price quotes. The average industry commission paid to buying houses was 5 per cent. However, CCT felt that its customers (primarily TexItalia) were offering more attractive prices compared to other customers and thus the additional 2 per cent was justified in lieu of the premium prices. This commission was paid by the Pakistani suppliers to CCT once payment was received from the customer on dispatch of goods. Although the suppliers were paying the commission to the buying house, the company was basically present to ensure that all customer requirements were met at the suppliers end. According to Khurshid, Getting a good customer account was the most important aspect of our business. Once a buying house has orders, suppliers automatically become interested in working with you. Thus, our primary objective was to keep our customers satisfied. We often pressurised suppliers to ensure that they took good care of our buyers. From its inception in April 2000, TexItalias business with CCT had flourished. By March 2002, TexItalia had placed orders worth US$ 2 million with the buying house. About 50 per cent of this business included orders for denim jeans. Orders for bedsheets, towels, bathrobes, knitted garments and dress shirts formed the other half of the total business volume.

TexItalia
TexItalia was owned by the Gruppo Avogadro, which also owned three other, well known textile retailers: Volta, Razanelli and Chiconi. Out of the four, TexItalia was the smallest company. Each company had its own purchase department which worked independently. However, the chief buyers of each company did recommend good suppliers to each other. TexItalia was an Italian retailer based in Florence. The company had a unique selling technique. Retail catalogues were printed for every season and sent to households situated in villages in Italy. The companys target customers were primarily farmers who lived in the villages. The retail catalogue mailing was followed by salesmen who drove TexItalia trucks to each village. These trucks had stocks of every product in the catalogue. Customers placed orders and paid cash right at their doorsteps. TexItalia had found a niche for itself in the market. All these farmers were located in areas from where the nearest retail supermarket offering similar products was at least a forty to sixty minute drive away. In 2002, TexItalia had a fleet of approximately 650 delivery trucks. Sales totalled roughly US$ 70 million. In addition to Pakistan, TexItalia procured garments and other
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textile mainly from Bangladesh, India, Morocco, Portugal, Tunisia, Turkey and a few other countries.

AZ Textiles
AZ Textiles was a woven garment stitching unit of very high repute in Pakistan. The company had started operations in the early seventies with four stitching machines, making about two dozen pairs of jeans per day. In 2002, after setting up a state-of-the art production facility on Defence Road, close to Raiwind on the outskirts of Lahore, AZ Textiles had a production capacity of 25,000 garments a day and had 2,600 employees. The company had set up its own sales offices in the UK, Germany and Belgium. The majority of customer accounts were handled through agents. AZ Textiles had signed an exclusivity agreement with the majority of its agents, which meant the company could not procure business through other agents in a specified country or region. AZ Textiles had achieved total sales of roughly US$ 40 million in 2002. Almost 90 per cent of its revenues came from Europe, while the remaining 10 per cent came from the US. It was working with renowned customers such as Auchan (France), WalMart (UK), Rinascente (Italy), GAP (US), RDK (Spain) and Diesel (Italy). Although TexItalia was not one of AZ Textiles largest customers, they realized that the customer had tremendous growth potential. Within a year of working together, TexItalia had transferred roughly US$ 1 million worth of business to AZ Textiles. It was estimated that this business was about one-third of TexItalias total jeans requirement for the year. Traditional markets for Pakistani textile manufacturers were Britain, Germany, the US and the Middle East. Almost all of CCTs suppliers were new to the Italian market and thus looked at the company favourably. They went out of their way to accommodate its requests. This was primarily because these established manufacturers wanted to expand and diversify into other countries, especially Italy. However, AZ Textiles was an exception. It already had a flourishing business in Italy; it was manufacturing products in large volumes for Carrefour, an Italian hypermarket. Despite its presence in Italy, AZ Textiles gave CCT highly preferential treatment. Khurshid had personally sold fabric to the owners for over four years as Marketing Director, Legler Nafees Denim Mills. The owners greatly respected him for his dealings and thus welcomed all business that CCT gave to AZ Textiles. The owners had recently taken a back seat in the business and had employed a team of young professionals to look after the expanding marketing department. Due to their religious commitments, the owners were often not present in the office. Thus, CCT communicated with Imran Saeed, the Marketing Manager and an account executive who handled the TexItalia account at AZ Textiles. Saeed had been Khurshids assistant in Legler Nafees Denim Mills. He considered Khurshid his mentor and had great respect
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for him. It was due to this relationship that Saeed was personally looking after the TexItalia account along with a junior account executive (see Exhibit 2 for more details on Saeed). In case of problems, the owners had instructed Khurshid to come straight to them. Although AZ Textiles had some very large customers, TexItalias account had shown phenomenal growth. TexItalia had given AZ Textiles high volume business right from the beginning. According to CCTs estimates, out of a total of approximately forty customers, TexItalia ranked roughly fifteenth in terms of value of total orders placed. TexItalias business was also preferred since the company paid good prices. According to Saeed, The average price paid by TexItalia was US$ 5 per garment, compared to Carrefour who paid us between US$ 44.25 per garment. Also, TexItalias orders were standard designs that were simple to manufacture. These orders resulted in higher productivity for us.

TexItalias Quality Department

During the initial business relationship, both CCT and AZ Textiles had encountered significant communication problems communicating with TexItalias quality department. CCTs contact person at TexItalia was Chiara Salvesi, a 21-year-old who had received technical training in textiles in Italy. According to Shehryar Khurshid, Marketing Manager of CCT, Chiara could speak virtually no English. She did not make any effort to learn English which we considered to be the common language between us. Whenever we called her, we faced difficulty in making her understand what we were saying. The initial size charts received from Chiara were all in Italian. She also made frequent changes to the size charts. These changes were faxed to us and at times due to poor transmission they were illegible. It appeared that Chiara was extremely overworked and was very slow in clearing our concerns. At times, we felt she did not enjoy dealing with us as suppliers from other countries all communicated with her in Italian. As a result of these problems, some orders had to be delayed since both AZ Textiles and CCT were not sure about the exact customer requirements regarding technical standards of the initial orders. However, the buying department of TexItalia was very accommodating and accepted all delays and in fact apologized to CCT for the poor communication from TexItalia. Shehryar got the feeling that Baresi and his team at the buying department of TexItalia were also quite dissatisfied with the attitude of the quality department.

The Problems Begin

After some initial trial orders, TexItalia placed its first major order with AZ Textiles in February 2001. These garments were to be retailed in Italy from September through December in the fall/winter season. The various orders were scheduled to be produced
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from March to July 2001 in Pakistan. CCT coordinated with both parties to ensure that the orders were manufactured on time and that they were according to the customers requirements that were specified in the technical file of each order. The quality inspector at CCT frequently visited AZ Textiles to ensure that production was according to the technical specifications sent by TexItalia. The quality of the first few shipments received by TexItalia in April 2001 was highly appreciated. The shipment received in May 2001, however, caused quality concerns at TexItalia. Chiara communicated to CCT and AZ Textiles that the last updated size specifications had not been followed and some measurements were consistently off by roughly 2 centimetres (cm) in almost every garment. The typical tolerance for measurements was plus/minus 1 cm. Chiara refused to accept the shipment in TexItalias warehouse. At that time Baresi, along with his Assistant Buyer Luigi Andenna, was visiting Pakistan to discuss the orders for the next buying season. During their meeting at AZ Textiles, both CCT and AZ Textiles raised the issue of the quality complaint. All correspondence was presented to Baresi, proving to him that the specification chart being referred to by Chiara had never been received by AZ Textiles. The last amended specification chart present in both CCT and AZ Textiles files was consistent with the measurements of the garments dispatched to Italy. Baresi was convinced that the problem was at his companys end and phoned Chiara right away to sort out the issue. Shehryar recalled, There were two of us from Creative Clothing and Textiles and four personnel from AZ Textiles marketing department sitting in the meeting when the call was made. For the first couple of minutes Alessandro explained his point of view patiently but then his voice grew louder before he finally slammed the phone down. He then turned to us and informed us that the shipment had been accepted and was in the process of being moved to the warehouse. He then turned to Khurshid and openly said, I knew Chiara was at fault. It is impossible that a company with such good systems could commit such a big blunder. We were all happy and also pleasantly surprised. No customer defended a supplier so openly in front of his own colleagues. However, things soon got worse. The next couple of orders also had minor complaints. It was standard practice at CCT to dispatch shipment samples to the customer in addition to conducting its own quality audit of the shipment to be dispatched. CCT had not spotted the problem and had recommended that the shipment was according to customer requirements and fit for dispatch. However, TexItalia, by examining the samples, found that the pattern in the orders was flawed and the trousers had an unusually round shape around the hip area. The entire shipment was opened up and the problem was fixed in the case of one order. However, in the other shipment the problem was more serious; AZ Textiles was stuck with 2,500 odd garments worth roughly US$ 10,000 to $12,000 that they could not sell.
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Shehryar remarked, This was a particularly embarrassing situation, especially after the stand Alessandro had taken for us. This event probably marked the beginning of a gradual decline in TexItalia and Alessandros faith in AZ Textiless abilities. Our reputation was also at stake since the defects had gone unnoticed in our quality audits.

The Problems Continue

By August 2001, TexItalia had received 90 per cent of the placed orders from AZ Textiles. No further complaints had been received. CCT was particularly happy that their first major season seemed to have gone off well without any major problems. However, their management could not have been more wrong. The reason why there were no complaints was that most of TexItalia employees had gone off on long holidays as was customary in Europe during the summer. Therefore, there was virtually no one in the company that CCT could communicate with. In the first week of September 2001, Khurshid received a phone call from Baresi. This was the first time they had talked in roughly two months. Khurshid, while recalling his conversation, remarked, Alessandro was unusually cold that day. He got straight to the point and informed me that he had had it with AZ Textiles. When I probed further he told me that the quality of the childrens jeans order was completely unacceptable and that he was finding it extremely hard to defend AZ Textiles in his company. The childrens jeans order had roughly 5,000 trousers and at US$ 5 per garment was worth approximately US$ 25,000. Since all orders were shipped against an LC, payment had been made to AZ Textiles. The LC required that CCT issue a quality certificate confirming that the goods were according to customer requirements. CCT had conducted its routine audit on the childrens jeans and had found no fault with them. Even TexItalia had not raised any concern on the shipment samples they had received. However, when the entire shipment was received in Florence, TexItalias quality department had found the goods to be completely unacceptable. Baresi was very firm this time and asked Khurshid to get AZ Textiles to refund roughly US$ 30,000 to compensate for the loss. The additional US$ 5,000 over the original value of shipment reflected the costs related to transportation, import duties and custom clearance that TexItalia had incurred on the order. Without wasting any time, Khurshid asked his quality inspector to review the shipment samples that they had for the childrens jeans and submit his report. The inspector found the samples to be acceptable. When the complaint was communicated to AZ Textiles, they also followed the same procedure and declared that the samples they had retained of the shipment were according to customer specifications.

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Imran Saeed was in AZ Textiles Brussels office at the time. When Saeed was informed of the complaint, he promised to go to TexItalia office in Italy and personally inspect the shipment. The matter was delayed because of his busy schedule in Europe. In late September, Saeed finally paid a visit to TexItalia along with a senior marketing official, who was looking after the operations of the Brussels office. Both confirmed that the goods were indeed below standard. However, they did not make any commitments on the refund issue. Saeed promised Baresi that he would get back to him on the matter after discussing it with the owners of AZ Textiles. Saeed also wanted to discuss orders and perhaps get a commitment for the next season with TexItalia. However, Baresi sidestepped the discussion in light of the unresolved refund issue. CCT pushed for a quick resolution of the refund issue. However, AZ Textiles was not willing to make commitments. When Saeed returned to Pakistan in mid-October, the owners of AZ Textiles were not available due to religious commitments. Saeed, seeing the owners absence, continued to avoid the issue. At the same time, he continued to push both TexItalia and CCT for future orders.

AZ Textiles Offer
By this time, Baresi was becoming upset with the attitude shown by AZ Textiles towards the refund issue. He communicated to both CCT and AZ Textiles that the possibility of future orders did not exist unless the past claim was settled. Finally, in mid-November Saeed offered TexItalia a 10 per cent discount on all future orders. AZ Textiles would continue to offer the discount until the full amount of the US$ 30,000 claim had been realized in discounts. Baresi immediately rejected the proposal. He wanted AZ Textiles to pay the claim right away before any future orders could be placed. Baresis stance is illustrated by Khurshid: Alessandro believed that suppliers should have a clean record before he discussed any future orders with them. He found it impossible to convince his management that despite the unpaid claims it was sensible to place orders with them. He considered linking discounts with future orders as a blackmail technique to ensure that the customer continued the business relationship. CCT instructed AZ Textiles to come up with a better offer. Khurshid pressed Saeed for a quick solution; however, Saeed defended his proposal and claimed that his offer was beneficial for both companies. The matter was delayed further as Saeed had to leave again on a business trip to Europe. Khurshid instructed Saeed to visit TexItalia during his trip to sort things out. However, Saeed did not visit TexItalia; instead he spent his time exploring new business opportunities for AZ Textiles.

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TexItalias Counter Offer

The revenue of CCT fell drastically as a result of this impasse. Maldini had taken his family for a holiday and had not interacted with Khurshid for over a month. As a result, Khurshid had to work with both TexItalia and AZ Textiles for a resolution. CCT pushed for a quick solution. In early November 2001, Khurshid spoke to Baresi to discuss possible means of resolving the deadlock. Baresi insisted on AZ Textiles paying the full refund upfront and offered help to AZ Textiles in finding a customer for the rejected garments. TexItalia had contacts with wholesalers and low-end retailers who purchased the companys leftover stock or rejected garments in bulk at significant discounts. Baresi estimated that he would be able to get AZ Textiles US$ 2.53 for each garment. However, he could not guarantee a customer. AZ Textiles responded to this suggestion by claiming that they had spoken to a German customer who was willing to buy the garments at US$ 4 per garment. They wanted to stick to the issue of the claim and maintained their initial offer. They did not want TexItalias help in selling off the goods. However, both TexItalia and CCT knew that AZ Textiles was bluffing. It was impossible to find a customer who would pay US$ 4 for rejected garments. Also, the goods had been cleared from customs by TexItalia on an import licence. It was impossible to export them to Germany with labels printed in Italian. The sizes and specifications also varied from country to country which would make them difficult to sell in Germany.

The Departure of Alessandro Baresi

In early December 2001, Khurshid received a phone call from his partner Maldini who informed him that Baresi had been fired by the TexItalia top management. This news came as a shock to both CCT and AZ Textiles. Baresi had been instrumental in transferring TexItalias business to Pakistan and had always had a positive image of Pakistani suppliers. Khurshid commented on this development by saying, Alessandros sacking came as a result of the internal politics within TexItalia. Ever since he joined TexItalia he had brought about radical changes in the organization. The old employees resisted these changes and as a result they started to develop negative sentiments towards him. Saeed said: Mr Baresi was an extremely professional person who empathized with the suppliers and always tried to come up with mutually beneficial solutions. Luigi Andenna, who had been Assistant Buyer during Baresis tenure, was promoted to Chief Buyer. Andenna had visited Pakistan with Baresi. In fact, the bulk of CCTs communication with TexItalia was handled by him. CCT and AZ Textiles did not look at Andenna very favourably. Shehryar said: We had no trouble in our dealings with Luigi. However, there were two factors that made us uncomfortable with him. First, his
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communication skills were far weaker than Alessandros. Second, Luigi had an introverted personality and we felt that he was not assertive enough to take bold decisions or to defend a supplier in front of the top management. CCTs management felt that Andenna was apprehensive about dealing with CCT and its suppliers. Baresi had brought about many changes in TexItalia including transfer of a large volume of its business to Pakistan. However, things had not gone well in Pakistan and it was felt that Baresis sacking was partially because of the quality problems TexItalia was having with AZ Textiles.

The Final Meeting

There was a break in communication with TexItalia after Andenna took charge. Andenna was working on bringing about changes in the company and thus could not spend much time communicating with suppliers. This situation, however, was greatly affecting CCT. CCT had a very limited number of orders to work on. Khurshid had expected that by December the orders for the next season would be under production. He started to phone Andenna every day. Andenna informed him that it was impossible for him to place any future orders with CCT until the AZ Textiles claim issue was solved. The TexItalia top management had formed a negative image of all Pakistani suppliers as they thought that AZ Textiles lack of professionalism was reflective of standard business practices in Pakistan. In January 2002, Khurshid and Shehryar decided to visit Europe to settle the issue with TexItalia and to seek new customers. Saeed was in Brussels at the time and had asked for a meeting with Andenna. Maldini arranged the meeting with Andenna, which was held over breakfast in a downtown hotel in Florence where Khurshid and Shehryar were staying. Khurshid was very clear about who he had to side with. For us TexItalia was more important than AZ Textiles. If you have a good buyer, quality suppliers will automatically come to you. Additionally, it was also a question of right and wrong. AZ Textiles had admitted their error so it was only fair that they should honour TexItalias claim. Saeed was asked to come up with a better proposal to settle the problem. Initially he talked about how important TexItalia was to AZ Textiles and the fact that they were committed to providing their customers with the best quality. Then, coming to the main issue, Saeed gave his new proposal. To everyones surprise it was exactly the same as the old proposal: 10 per cent off on future orders until the claim had been reimbursed in full. Andenna recalled his reaction to the offer: I was furious. The negotiations had lingered on for five months and Imrans offer took us back to square one. I let Imran know how I felt and told him to stop wasting our time. I had left my commitments to drive down to Florence for the meeting while Iftikhar and Shehryar had come all the way from Pakistan. I warned him that the textile world was very small. Word gets around
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quickly and we had enough contacts to circulate the story of AZ Textiles unprofessional approach with us in the market. Maldini and Khurshid intervened when they heard Andennas reaction. They pressurized Saeed to come up with a better offer. Saeed stated: This is only the starting point of negotiations and we can of course mutually come up with a more acceptable solution. Khurshid took Saeed aside and asked him to tell him the maximum leeway he had in settling the issue. Saeed did not give a concrete answer and instead decided to call AZ Textiles owners in Pakistan to discuss the issue further. He spent fifteen minutes talking to his bosses. During the conversation Khurshid also spoke to Anwar Niaz, the owner of AZ Textiles. Niaz wanted Saeed and Khurshid to settle on any solution as long as TexItalia would give them future business. We are interested in working with TexItalia and are willing to offer a 15 per cent discount on all future orders. However, we will need your help in finding a customer for the rejected goods. This was Saeeds offer after his conversation with Niaz. Andenna was not impressed and insisted on payment of the entire claim upfront. He told him, Imran, we understand that no manufacturer is perfect. Problems in manufacturing can occur. However, we cannot give a supplier more orders when we know that they have had a bad past with us and are not good at clearing their debts. The way we operate, we want the suppliers to clear their past bad records before we can talk about future business. Khurshid spoke to Saeed once again and pressurized him to pay the claim, promising to discuss future business with TexItalia as soon as the claim was settled. Saeed gave no response and Khurshid thought that they had finally reached an agreement. Khurshid told Andenna that AZ Textiles had agreed to settle the claim. While he was repeating the offer, Saeed intervened and told Khurshid that he could not commit on such a settlement. Saeed then called his bosses in Pakistan and came back with another offer. We are willing to give you a 20 per cent discount on all future orders until the claim is settled, Saeed said. Andenna did not budge. He insisted on his original stance of AZ Textiles paying the entire claim upfront. Saeed did not give any further offers but promised to discuss the issue further with his bosses.

The Current Situation

Khurshid returned to Pakistan extremely disappointed. Not only had he failed to resolve the deadlock, he had also received a lukewarm response from other customers, who were wary of working in Pakistan due to security concerns in the post-11 September 2001 scenario. There were a number of options he was thinking about. He could try and talk to the owners of AZ Textiles again. They had known him for a long time and respected

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him. But would they listen to him if they were convinced that TexItalia would never do business in Pakistan again? He also thought about paying the outstanding amount to TexItalia himself. It was not a small amount but it would defuse the situation. Was it appropriate? What would it do to the overall relationship between the three parties if TexItalia found out who paid the money? Other clients seemed hard to come by. The last option was to close down Creative Clothing and Textiles. Whatever his decision, it had to be made soon, before TexItalia decided to end its relationship with Khurshids buying house.
Please address all correspondence to Shehryar Khurshid and Salman Ghani Butt (students, MBA), and Dr Arif Nazir Butt, Lahore University of Management Sciences, Opposite Sector U, DHA Lahore Cantt, Pakistan. E-mail address: skhurshi@hotmail.com, salman.butt@ gmail.com and arifb@lums.edu.pk
Exhibit 1 Profiles of Negotiating Companies Company Date of set-up Annual revenue Commission structure Major clients Company Date of set-up Annual revenue Net margin Major clients Company Date of setup Annual revenue Major sourcing countries Creative Clothing and Textiles April 2000 $2,400,000 7% Commission TexItalia AZ Textiles Early seventies $35,000,000 20% Auchan, Carrefour TexItalia The forties $70,000,000 Brazil, Morocco, Tunisia, Turkey, Pakistan, Portugal

Source: Interviews with concerned personnel in each company. Exhibit 2 Profile of Negotiators/Key Players Iftikhar Khurshid: Khurshid was the 53-year-old Managing Director of Creative Clothing and Textiles. His previous work experience included four years as Marketing Director at Leglar Nafees and seven years as Marketing Manager at Hala Enterprises Ltd. He had also served in the Pakistan Armed Forces for eighteen years. He was well known in the textile industry and enjoyed respect from clients as well as suppliers. He had excellent communication abilities and liked to resolve issues as soon as possible.

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Mario Maldini: Maldini, who was 55 years old, was an equal partner with Khurshid in CCT. He had worked in the textile industry for over twenty years. His past experience included many years as the Purchase Manager of the famous Italian brand Diesel. He had worked with Pakistani suppliers in the past for roughly five years. He was an extrovert and had a great sense of humour. Maldini had amassed considerable wealth over his career and thus treated CCT as a means to stay busy. Imran Saeed: Saeed was 27 years old. He was the Marketing Manager at AZ Textiles. He had joined AZ Textiles only three years earlier and had seen an exponential career growth since. He was a social person and entertained his clients well on their visits to Pakistan. Alessandro Baresi: Baresi was 45 years old. He was the Chief Buyer of TexItalia till December 2002. He had an experience of fifteen years in the textile industry. He was an impulsive person, known to take bold decisions on the spot without consulting his superiors. He maintained excellent relations with the suppliers he worked with. When the suppliers visited Italy, he made sure that they felt at home. Luigi Andenna: Andenna was 32 years old. He became the new Chief Buyer of TexItalia when Baresi was fired. Luigi had a degree in textile design from an Italian polytechnic institute. He was an introvert by nature and lacked the assertiveness that his predecessor had possessed. Source: Iftikhar Khurshid, Creative Clothing and Textiles.

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