Texitalia Versus Az Textiles The Deadlock in Negotiations PDF

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
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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 TexItalia’s procurement interests in
Pakistan. TexItalia’s 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 TexItalia’s claim of US$ 30,000
ourselves? No matter how hard and honestly you work you are always vulnerable to a
supplier’s mistakes.’

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 pre-
mium 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 manu-
facturers 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 manu-
facturers. 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 intensify-
ing 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 customer’s representative, ensuring that the customer’s require-
ments 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 in-
volved. 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 manu-
facturer. The LC ensured that the manufacturer would receive payment of goods as soon
162 SHEHRYAR KHURSHID, SALMAN GHANI BUTT AND ARIF NAZIR BUTT
as all supporting documents (export bill, bill of landing, custom clearance, quality cer-
tificate 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 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 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 re-
strictions 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 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
TEXITALIA VERSUS AZ TEXTILES 163

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 cus-
tomer’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 ven-
ture 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, 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 manu-
facturers and was responsible for monitoring production and communicating with cus-
tomers 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.
The main reason for this was that Italian retailers tended to order different types of pro-
ducts 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 pro-
duction 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 signifi-
cant 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 cer-
tain 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 suppliers. 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 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 cus-
tomers were not even willing to visit us. As a result, we became heavily dependent on
TexItalia’s business.’

TexItalia accounted for roughly 80 per cent 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 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 supplier’s 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, 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 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 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. 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
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 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 of 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 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 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 owners had instructed Khurshid to come straight to 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 a total of approximately forty customers,
TexItalia ranked roughly fifteenth 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 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 sup-
pliers 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
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 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 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 TexItalia’s 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 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 pro-
cess 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 require-
ments 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.

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’s faith in AZ Textiles’s 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 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 con-
firming that the goods were according to customer requirements. 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
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 children’s jeans and submit his report. The inspector
found the samples to be acceptable. When the complaint was communicated to AZ Tex-
tiles, they also followed the same procedure and declared that the samples they had
retained of the shipment were according to customer specifications.
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. 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 his manage-
ment that despite the unpaid claims it was sensible to place orders with them. He con-
sidered 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.

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 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 com-
pany’s leftover 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 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
TexItalia’s 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 im-
port 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
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
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 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 the top management.’
CCT’s 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 Baresi’s 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 TexItalia’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 with 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 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 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 was 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 pres-
surized 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 Saeed’s offer after his con-
versation 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 manu-
facturing 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
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 Khurshid’s
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 Creative Clothing and Textiles
Date of set-up April 2000
Annual revenue $2,400,000
Commission structure 7% Commission
Major clients TexItalia
Company AZ Textiles
Date of set-up Early seventies
Net margin 20%
Major clients Auchan, Carrefour
Company TexItalia
Date of setup The forties
Major sourcing countries 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.

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.

Texitalia Versus Az Textiles The Deadlock in Negotiations PDF

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Asian Journal of Management Cases

TexItalia versus AZ Textiles: The Deadlock in Negotiations

The online version of this article can be found at:

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TEXITALIA VERSUS AZ TEXTILES: THE DEADLOCK IN NEGOTIATIONS

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Industry Norms Regarding Quality Problems

TEXITALIA VERSUS AZ TEXTILES 163

BACKGROUND INFORMATION ON THE PARTIES INVOLVED

Creative Clothing and Textiles

TEXITALIA VERSUS AZ TEXTILES 165

TEXITALIA VERSUS AZ TEXTILES 167

TexItalia’s Quality Department

The Problems Begin

TEXITALIA VERSUS AZ TEXTILES 169

The Problems Continue

TEXITALIA VERSUS AZ TEXTILES 171

The Departure of Alessandro Baresi

The Final Meeting

TEXITALIA VERSUS AZ TEXTILES 173

The Current Situation

TEXITALIA VERSUS AZ TEXTILES 175

Source: Iftikhar Khurshid, Creative Clothing and Textiles.

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