ASIAN JOURNAL OF MANAGEMENT CASES, 1(2), 2004

SAGE PUBLICATIONS NEW DEHLI/THOUSAND OAKS/LONDON

TEXITALIA VERUS AZ TEXTILE: THE DEADLOCK IN NEGOTIATION

Shehryar Khurshid

Salman Ghani Butt

Arif Nazir Butt

This case covers the course of Services Marketing and 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(Service Providers)
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 negotiations, 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 order 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 Texitalia’s procurement interests in
Pakistan. Texitalia’s denim business with AZ Textile 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 operation from the
profit we have made? Should we have offered to pay Texitalia’s claim of US$ 30,000
ourselves? No matter how hard and honestly you work you are always vulnerable to a
supplier’s mistake.
 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
manufacturers. 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 bigger
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 a practically impossible and financially
prohibitive for a customer to visit every manufacturer to oversee production and check the
quality of products being manufactured. As a competition in a foreign retail markets was
intensifying and the focus on the cost and quality was increasing, customer had started
preferring working with buying houses. A buying house took care of the entire
procurement process and functioned as a customer’s representative, ensuring that the
customer’s 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 house’s 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 manufacturers 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 manager 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 favor of the manufacturer
would receive payment of goods as soon as all supporting documents (export bills, bill of
landing, customer clearance, quality certificate from 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 LC.

As soon as production began at the manufacturer’s end, the buying house started
conducting routine quality checks to ensure that the production was according to the
customer’s requirements. In addition, the buying house inspected and approved the fabric
color 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 of customer was satisfied with the goods received.

Industry Norms Regarding Quality Problems

Despite 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. This buying house played a key role in resolving the problem. According
to Khursid, '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
restriction 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 presents in the customer's 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$ 30,000-US$50,000) in Europe cost between US$ 2,000-
US$2,500. While these charges were high, they were still feasible considering the value of
the shipment that might be lost due to the customer's claim. It was typically advantageous
to have a third party audit to verify the customer's claim, since the customer's 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 company’s
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, buying
house, successfully run, can offer exponential growth and a much higher pay-off compared
to a job in 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 (Exhibit 1 and 2 gives information on the profiles of the
companies and the players involved). Maldini primarily took care of the marketing side fot
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
process 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 few product lines was generally favored in the industry as it allowed for
specialization. However, CCT wanted to diversity into many product lines. The main reason
for this was that Italian retailers tended to order different type of products for retail
purposes. If they could coordinate all the 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 make 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 Textile in Lahore for woven garments, Chenab Textiles in
Faisalabad for bedsheets, High Noon in Lahore for knitwear, Hala Enterprise in Lahore for
towels and bathrobes and Chittagong Fashions in Bangladesh fir 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 contracts to set up an initial meeting with Texitalia. A
few months later, Texitalia sent its chief buyer, Alssandro Baresi to evaluate the production
facilities for textile garments and home textile 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 the
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 Texitalia's 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 supplier. From the initial sampling
stage till the time goods landed in Texitalia's 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 other various customers in Italy, from whom it was able to acquire
some small trial orders. However, these trial orders did not materialise 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 TexItalia's business.

Texitalia accounted for roughly 80 percent of CCT's 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
house 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
percent 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 the customer requirements were met at
the supplier's end. According to Khurshid, 'Getting a good customer account was the most
important aspects 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 the inception in April 2000, Texitalia's 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 to 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 has its own purchase department which worked independently.
However, the chief buyers of each company did recommend good suppliers to each other.

Texitalia was 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 company's 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.
Consumers placed orders and paid cash right at their doorsteps. Texitalia had found the
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 minutes’
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 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 pair of jeans per day. In 2002, after setting up the state of the art
production facility on Defence Road, close to Raiwind on the outskirts of Lahore, AZ
Textiles had 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 realised that the customer had tremendous
growth potential. Within the 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 Texitalia's total jeans requirement for the year.

Traditional markets for Pakistani textile manufacturers were Britain, Germany, the US and
the Middle East. Almost all CCT's 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 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 dealing s and thus welcomed all business that CCT gave to AZ Textiles. The owner
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 Khurshid's assistant in Legler Nafees
Denim Mills. He considered Khurshid his mentor and had great respect 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 owner had instructed Khurshid to come straight on them.

Although AZ Textiles had some very large customers, Texitalia's account had shown
phenomenal growth. Texitalia had given AZ Textiles high volume business right from the
beginning. According to CCT's estimates, out of total approximately forty customers,
Texitalia ranked roughly fifteen in terms of value of total orders placed. Texitalia's 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$4-4.25 per garment. Also, Texitalia's orders were standard designs that were
simple to manufacture. These orders resulted in higher productivity for us.

TexItalia’s Quality Department

During the initial business relationship, both CCT and AZ Textiles had encountered
significant communication problems communicating with Texitalia’s quality department.
CCT’s 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 was considered to be 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 accepting all delays and in fact apologize 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 Problem 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
from March to July 2001 in Pakistan. CCT coordinated with both parties to ensure that the
orders were manufactured on the time and that they were according to the customer’s
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 measures were consistently off by roughly 2 centimetres (cm) in almost
every garments. The typical tolerance for measurements was plus/minus 1 cm. Chiara
refused to accept the shipment in Texitalia’s warehouse. At the time Baresi, along with the
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 measurement of the garments dispatched to Italy. Baresi was convinced
that the problem was at his company’s 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, thins 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
cast of one order. However, in the other shipment the problem was more serious, AZ
Textiles was stuck with 25,000 odd garments worth roughly US$ 10,000 to $12,000 that
they could not sell.

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 Alessandro faith in AZ Textile’s abilities. Our reputation was also at
stake since the defects had gone unnoticed in our quality audits’.

The Problem Continue

By August 2001, Texitalia had received 90 per cent of the placed orders from AZ Textiles to
further complaints had been received. CCT was particularly happy that their first major
season seemed to have gone off well without any major problem. However, their
management could not have been more wrong. The reason why there were no complaints
was the 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 we
could communicate with.

In the first week of September 2001, Khurshid received a phone call from Baresi. This is 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 it with AZ Textiles. When I probed further he told me that the
quality of the children’s jeans order was completely unacceptable and that he was finding it
extremely hard to defend AZ Textiles in his company’.

The children’s 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 consuming that the
goods were according to the customer requirement. CCT had conducted its routine audit on
the children’s 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, Texitalia’s quality department had found 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 national US$ 5,000 over the
original value to shipment reflected the costs related to transportation, import duties and
custom clearance that Texitalia had incurred on the consumers.

Without wasting any time, Khurshid asked his quality inspector to review the shipment
couples that they had for the children’s jeans and submit his report. The inspector had the
samples to be acceptable. When the complaint was communicated to AZ Textiles they also
followed tbe same procedure and declared that the samples they had lined of the shipment
were according to the customer specification.

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 the 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 owner 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 for 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 the times, 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
Saaed 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 proposal. He wanted AZ Textiles to pay the claim right away
before any future orders could be placed. Baresi’s 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 hi 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 spends his time exploring
new business opportunities for AZ Textiles.

TexItalia’s 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 for
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 company’s left over
stock or rejected garments in bulk at significant discounts. Baresi estimated that he would
be able to get AZ textiles US $ 2.5-3 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 garment at US $4 per garment. They wanted to stick
to the issue of the claim and maintained their initial offer. They did not want TexItalia’s 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 customers by TexItalia on an import license. 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 has been fired by TexItalia top management. This news came as a
shock to both CCT and AZ textiles. Baresi had been instrumental in transferring TexItalia’s
business to Pakistan and had always had a positive image of Pakistani suppliers. Khurshid
commented on this development by saying:”Alessandro’s 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 cganges 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 Baresi’s tenure, was promoted to chief
buyer. Andenna had visited Pakistan with Baresi. In fact the bulk of CCT’s 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 communication skills
were far weaker than Alessandro’s. 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
top management.”

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 very limited 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 decide to visit Europe to settle the issue with
TexItalia and to seek new customers. Saeed was in Brussels at the time and he asked for a
meeting with Andenna. Maldini arranged the meeting with Andenna which was held over
breakfast in 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 errorso it was only fair that they should honor TexItali’s 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 the best quality. Then coming to the main issue, Saeed gave his
new proposal. To everyone’s surprise it was exactly the same as the old proposal: 10
percent off on the future orders until the claim had been reimbursed in full. Andenna
recalled his reaction to the offer: “I was furious the negotiations had lingered for five
months and Imran’s 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 is very small. Word gets around 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 Andenna’s 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 the maximum leeway he had in settling the
issue. Saeed did not give a concrete answer and instead decided to call AZ textiles’ owners
to Pakistan to discuss the issue further. He spent fifteen minutes talking to his bosses.
During his conversation Khurshid also spoke to Anwar Niaz the owner of AZ textiles. Niaz
wanted Khurshid and Saeed 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
percent discount on all future orders. However we will need your help in finding a
customer for the rejected goods.” This was Saeed’s 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
businesses.”

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 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 percent discount on all future orders until the claim is settled Saeed said. Andenna
did not budge. He insisted on his original stance of AZ textile 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 respect 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 I 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 Khurshid’s buying house.
 Exhibit 1

Profile of Negotiating Companies

Company Creative Clothing and Textiles

Date of setup April 2000

Annual revenue $ 2,400,000

Commission structure 7% commission

Major clients TexItalia

Company AZ Textiles

Date of setup Early seventees

Annual revenue $ 35,000,000

Net margin 20%

Major clients TexItalia

Company TexItalia

Date of setup The forties

Annual revenue $ 70,000,000

Major sourcing countries Brazil, Morocco, Tunisia, Turkey, Pakistan,

Portugal
 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 client as well as suppliers. He had excellent communication
abilities and liked to resolve issues as soon as possible

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 include
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 humor. Maldini had amassed considerable wealth over his career and thus
treated CCT as means to stay busy.

Imran Saeed: Saeed was 27 years old he was the marketing manager at AZ textiles. He had
joined AZ textiles three years earlier and had seen an exponential growth in career 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 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 they felt at home.

Luigi Andenna: Andenna was 32 years old. He became the new buyer of TexItalia when
Bresi 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.