By Yossi Sheffi, Director, MIT Center for Transportation & Logistics
COVID-19’s lockdowns have required people to replace much of the in-person communication they conducted at work — as well as with customers and suppliers — with virtual meetings on platforms such as Zoom, Teams, and Hangout. When the coronavirus crisis subsides, will people return to physical meeting places or cling to the virtual equivalents they have become familiar with?
The dilemma is especially acute when thinking about meetings with faraway suppliers and customers. In such cases, the pressure to avoid expensive trips and time away from families may reduce the frequency of face-to-face meetings.
We don’t know for sure what the outcome of these deliberations will be. However, one thing is certain: in-person meetings will still be a vital part of doing business because they engender trust. This commodity is critically important to the health of any enterprise.
The components of trust
One of the elements of trade relationships that can be tested during a crisis is the bond of trust between buyers and sellers. A definition of trust is the willingness to accept vulnerability based on positive expectations of the intentions or behavior of the counter party.[i]
The figure above illustrates the expectation and vulnerability dimensions of trust, as defined in the paragraph above. The riskiest quadrant is where vulnerability is high, and there is little expectation that the counterparty will fulfill its obligations and abide by the agreement.
As shown in the figure, the two principal ways to increase trust are either to increase the incentive for the expected outcome or reduce the vulnerability (or both). A customer can increase the likelihood of getting what it needs by increasing the price it pays the supplier. It can also reduce its vulnerability by having multiple sources of supply. When a supplier asks for early payment, it achieves both. An early payment reduces its risk, especially if it covers the raw material cost and the work. An early payment also creates an incentive for the customer to follow through with the order since it is already paid for (in whole or in part).
In a crisis, parties can get away with not fulfilling obligations by, for example, shipping sub-par products, not paying on time (or not at all), canceling orders, and leaving suppliers stuck with sizeable raw material inventory, etc. The crisis provides a ready excuse for non-performance, including invoking force majeure clauses. It also creates many opportunities for one-time deals where there are no on-going relationships and, therefore, lower incentives to deliver the expected outcome.
During day-to-day business, these risks are limited because trading between supplier and customer is on-going, and neither side desires to cause a break-up in the relationship.
One of the results of the coronavirus crisis is that companies have gained a deeper appreciation of the importance of trust built over a long period.
As Lynn Torrel, Chief Procurement and Supply Chain Officer at the giant custom manufacturer Flex explains: “We’ve had a few escalation calls with suppliers, and you get on a call and there are critical needs. Often, it’s someone I’ve known for many years. We had a hard negotiation and then had a really good dinner and spent time together, and we’re always seeing each other at different events. I think that personal side is important, especially the relationships and trust that build over time.”[ii]
The existence of trust in supply chain relationships means that a customer will not have to pay extra or look for new suppliers to reduce its vulnerability. And suppliers will not have to raise their prices or demand early payments to cover a non-payment risk.
The value of personal relationships in creating trust may be difficult to build through video chat calls. As a result, business people will have to board airplanes, stay in hotels, and eat in restaurants to continue building the personal relationships that create trust.
Such relationship-building can be even more important when business contacts are based in faraway countries. Trust is key to overcoming cultural, geographic, and language differences between trading partners.
Nothing like the personal touch
Virtual meetings are here to stay and might replace some of the time-wasting in-person gatherings that plague many workplaces. Online communications platforms will continue to improve, as will our ability to use virtual meeting places to transact business and carry out day-to-day managerial tasks.
However, there is still no substitute for personal contact when it comes to building business relationships, and this is unlikely to change in the foreseeable future. Trust me.