Structure negotiations so that the responsibilities, risks, and rewards of achieving sustainability outcomes are shared. Begin by understanding the supplier’s perspective on which cost factors could stretch them financially.1 Then make sure to avoid high-pressure negotiation strategies that will compromise the supplier’s ability to meet social and environmental terms. These strategies include, promoting cost competition or imposing short deadlines.
You can also incentivise sustainability innovation and performance during negotiations by proposing a “gain sharing agreement” where suppliers receive payment in exchange for performance improvement, such as reduced GHG emissions.2 The distribution of benefits would need fairly negotiated.
Another key consideration at this stage is risk-sharing related to foreign exchange or commodity price fluctuations. Especially for smaller suppliers with limited hedging capacity.
EXAMPLE: Marks and Spencer (UK) ringfences labour costs
Marks and Spencer (United Kingdom) developed a “Cost Price Model tool” to ringfence labour costs. This meant labour costs were marked as a separate fixed cost and excluded from price negotiations allowing suppliers to pay living wages.3
EXAMPLE: Undercompensated suppliers unable to meet compliance requirements
In the fashion industry, more than 20% of suppliers indicate that less than 80% of the orders received from retailers or brands were priced to cover the cost of social, environmental, quality, and other compliance requirements.4