Thank you for joining me for What the Duck, another supply chain podcast brought to you by SourceDay. I’m your host, Sarah Scudder, and this is the podcast for people working in the direct materials part of the supply chain. Today, I’m going to be joined by Alex Mesanza, and we’re going to discuss how to negotiate optimal long-term direct materials contracts.

If you work for a manufacturer and are struggling to negotiate long-term win-win contracts, then this episode is for you. I’m @SarahScudder on LinkedIn and @SScudder on Twitter. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct supply chain content. Today, I’m excited to be joined by Alex Mesanza.

Alex is the division head of Global Business Supply Chain Management, Optical Fiber and Cable at Corning Inc. Corning is a glass, ceramics, and concrete manufacturer. Alex is responsible for raw materials, strategic sourcing, and procurement oversight for a multibillion-dollar division. He negotiates multimillion-dollar global contracts and is responsible for the implementation of risk monitoring philosophy across the organization. Welcome to the show, Alex.

Thank you, Sarah. Really appreciate you inviting me for this session.

So, you run overnight races. What the heck are these?

Yes, I do. I’ve been doing these relay races for several years already, and these are basically usually 200-plus mile relay races. They’re made up of four to 12 battle-hardened athletes who take turns running portions of the course over a period of 30 hours or so, depending on pace. And I have to admit, the running part is the least fun, at least for me.

Some people enjoy it. I particularly don’t like running, but if I had to boil it down to one single, why I do this? It’s really the camaraderie. I mean, imagine a bunch of individuals crammed in a smelly van with lack of sleep, aching and cramping legs and scrambling to get out of the van to make sure that the handoff between the runners goes as smoothly as possible.

And I know what you’re probably thinking. Where’s the fun? Well, I just can’t think of a better example of unity, compassion, humility, acceptance, and, most importantly, leadership that takes place during the course of the race. And as a matter of fact, I just completed one this past weekend. It was the Blue Ridge relay. It was from Grayson Highlands, Virginia, to Asheville, North Carolina. It was 208 miles with a total of 27,000 feet of elevation change across the race.

I was in a team of ten individuals, and we placed second in our division out of five very tough teams. So really, a really great accomplishment for the team this weekend.

Now, you said you don’t really like running. How long do you run?

It depends on the length of the segments each person runs, but in this particular case, I was running three legs. It was a total of eighteen miles, but I’ve done some relay races where it’s only six of us running and that can go up to 27-30 miles in the period of 30 hours or so.

So we’re talking marathon distances?

Yeah. Yeah. Broken up into segments, but yeah.

So, when you and I were prepping for the show, you talked a lot about success in your personal life, in the races we just discussed and also in your career. What does success look like to you?

So, I have to say that this is like, you know, it’s a simple yet complex question, and I’m probably going to get a little bit philosophical here when I answer this. Now, I believe success is a matter of perspective. It’s all about that personal journey everyone has to face or in this one shot would get in life. So, what’s successful for me may not be successful for other individuals.

Right? So, it’s very… it’s a very personal type of experience. I broadly define it as the ability to achieve your goals, despite uncontrollable and unforeseen challenges that life throws at you. And in the end, you know, it’s all about the journey towards a goal rather than the goal itself. Take, for example, you know, climbing a mountain. Once you get to the top of the mountain, it lasts maybe 60 seconds, and then you’re off to the next mountain, right?

So, it’s really about the journey. I’ve heard some people simply state that clearly stating your goals is a way to achieve success, but I would add a qualifier to that statement. I would say that the goal not only has to be clearly stated, but it also needs to be genuine. There has to be a meaning, a passion, a relentless driving force behind the goal. Something that gets to the root of who you are as a person.

Like for me, for example, you know, when I think about my professional success, it means the ability to solve complex problems in a collaborative manner while coaching others on how to do the same. That’s how I define success for me. If I’m able to do this as a profession, right? Solve complex problems, collaborating and teaching others to do the same.

Then to me, I feel that I’m being rewarded personally, and I feel successful. Early in my career, I did have a fantastic mentor, and she once told me, “Don’t obsess about your compensation or title. Focus on your passion, and then the rest will follow.”

So, I actually would like to hear about your personal journey and how you wound up in supply chain.

Well, that’s an interesting story because it all starts with me going to school for engineering, and I really didn’t know what I wanted to do in terms of engineering. I knew it was something an engineer. I just didn’t have a real clear path. I started out in civil engineering and I ended up graduating with a bachelor’s in industrial engineering, and that’s mainly because that was the only type of engineering that did not require a class that I had failed, which I did not want to take again.

I think it was either thermodynamics or Applied Materials. I can’t remember now, but it was this one class that really struggled throughout the entire time that I was there, and I just did not want to take the class again. So I went around to all different engineering departments and finally Industrial Engineering said, “Nope, we don’t you don’t have to take this class.”

So that’s how I, by default process of elimination ended up as an IE grad. And right out of college, I landed a role as a process engineer in a distribution center at a company called Lucent Technologies, which is now no longer around. It went through several mergers and acquisitions, etc., but it’s no longer around and this was in Columbus, Ohio. So, while I was glad to have, quote unquote, an adult job, I was dreading it probably six months into it.

This is right around the time when Brazil was privatizing the telecom sector, and Lucent had decided to open a manufacturing facility in Sao Paolo. I just so happened to be the only person in the wireless division based out of Columbus, Ohio, who spoke Portuguese. So I was tasked with basically going down to Brazil and helping set up all the materials, planning, information processes, along with assisting with staffing of the materials management, logistics and I.T. functions locally and from that point on, I was hooked. And all my roles have been in some aspect of supply chain. Even before it was a “thing”, even before it was coined supply chain.

Well, that’s an interesting story because it all starts with me going to school for engineering, and I really didn’t know what I wanted to do in terms of engineering. I knew it was something an engineer, I just didn’t have a real clear path. I started out in civil engineering, and I ended up graduating with a bachelor’s in industrial engineering, mainly because that was the only type of engineering that did not require a class that I had failed, which I did not want to take again.

I think it was either thermodynamics or Applied Materials. I can’t remember now, but it was this one class that I really struggled with

Well, that’s an interesting story because it all starts with me going to school for engineering, and I really didn’t know what I wanted to do in terms of engineering. I knew it was something an engineer, I just didn’t have a real clear path. I started out in civil engineering, and I ended up graduating with a bachelor’s in industrial engineering, mainly because that was the only type of engineering that did not require a class that I had failed, which I did not want to take again.

I think it was either thermodynamics or Applied Materials. I can’t remember now, but it was this one class that I really struggled with throughout the entire time that I was there, and I just did not want to take the class again. So I went around to all different engineering departments, and finally, Industrial Engineering said, “Nope, you don’t have to take this class.”

So that’s how I, by default, process of elimination ended up as an IE grad. And right out of college, I landed a role as a process engineer in a distribution center at a company called Lucent Technologies, which is now no longer around. It went through several mergers and acquisitions, etc., but it’s no longer around, and this was in Columbus, Ohio. So, while I was glad to have, quote unquote, an adult job, I was dreading it probably six months into it.

This is right around the time when Brazil was privatizing the telecom sector, and Lucent had decided to open a manufacturing facility in Sao Paolo. I just so happened to be the only person in the wireless division based out of Columbus, Ohio, who spoke Portuguese. So I was tasked with basically going down to Brazil and helping set up all the materials planning, information processes, along with assisting with staffing of the materials management, logistics, and I.T. functions locally, and from that point on, I was hooked. And all my roles have been in some aspect of supply chain, even before it was a “thing”, even before it was coined supply chain.

Why the focus on manufacturing?

I think part of it has to do with the fact that that’s how I started. I started my career working in the manufacturing company – the manufacturing of telecom equipment. And really, I mean, if you have aspirations to work in supply chain, manufacturing is really the place to be. In my in my personal from… my personal experience. I mean, it’s chaotic, unpredictable, complex.

Most of all, I think it’s ripe with opportunities for process improvement. Efficiency gains, cost and network optimization, yield improvement. So, it’s very rewarding from that perspective. And again, particularly because I’m the kind of person [who] define success as solving complex problems. So it was a good fit for me personally in manufacturing, in supply chain. Now, I did do a short stint in a financial services institution.

And while I learned a lot about purchasing operations and back office, best practices procure to pay, et cetera, it just lacked that immediate response signal that you get in a manufacturing company when you’re cranking out durable goods. It’s just a different environment and I really enjoy knowing right away if what I’m doing is helping or hurting. So, I can course correct and continuously improve.

What’s a day in the life of Alex, the head of supply management look like?

Chaotic, crazy, insane. Especially these days, you know, with everything is going on, you know, in supply chain. But, you know, when you’re part of a large division responsible for significant contribution to top line revenue, being a master juggler with balancing skills is really a must. I’m constantly shifting from short-term-tactical-firefighting type of issues where I’m helping the team work through force majeure.

So you’ve mentioned a couple times the word chaos and juggling and managing a lot every single day. How do you know where to spend your time?

So without say that the focus on when to spend my time really is driven by from a short-term perspective, obviously. No. What is that crisis of the week that could potentially shut down operations? So if I look at it from a short-term view, that’s where myself and my team are going to spend most of our time.

But also and this is part of the challenge, especially lately, you know, with so many issues happy and the same time. It is absolutely imperative that I carve out time for myself and for my team, for us to take a step back from all of the short term issues that we’re facing and trying to understand what do we need to do today to prevent issues from happening.

Six months from now, a year from now, five years from now.

So when you and I were prepping for the call and you just mentioned this as well, dealing with short term challenges and issues, you mentioned your biggest direct spend challenge this year has been resolving supplier some tier material issues. What does this mean?

Sure. So let me start by just kind of center stage. You know, the world has changed significantly since COVID. We are living in unprecedented times dealing with situations that no one really had adequately planned, much less thought about their indirect impacts. So, for example, no one predicted that the impact of being locked down would trigger a massive uptick in demand for whatever Amazon carries in their infinitely vast catalogs, by the sheer frenzy of stress, fueled by work-from-home convenience, government financial assistance, and just pure boredom. It had a ripple effect on the already very frail ocean freight industry. If you think about it, that industry now only really makes money when they sell 90% full. So, when their demand all of a sudden increased north of 30%, there was no headroom to absorb.

So who knew that? Who knew that that was going to be something you have to deal with? It was really unpredictable. Now, so if you take that same type of situation, you apply it to industrial suppliers, no one was really ready for the spike in demand. Uncertainty and fear of the unknown caused many feedstock suppliers to take cover, ratchet down and kill production lines, and cancel orders with their suppliers.

So, that really constrained the supply chain to the point that no one was ready to absorb the incremental demand. So, as we started to dig into delivery issues and force majeures, it became very clear that the issue was not always with our suppliers. It didn’t mean that our suppliers had killed production lines or stopped buying materials or anything like that, but rather it had to do with a couple of levels below their supplier suppliers and maybe even another tier below.

So what we had to do, we had to leverage the strategic relationships that we had been grooming for many, many years to convince suppliers to open up and share their challenges. Then we had to make some tough choices and step in to resolve some of those suppliers’ issues in areas where we had maybe better leverage, like transportation, for example.

Sure. So let me start by just kind of center stage. You know, the world has changed significantly since COVID. We are living in unprecedented times dealing with situations that no one really had adequately planned, much less thought about their indirect impacts. So, for example, no one predicted that the impact of being locked down would trigger a massive uptick in demand for whatever Amazon carries, in their infinitely vast catalogs, by the sheer frenzy of stress, fueled by work from home convenience, government financial assistance, and just pure boredom. It had a ripple effect on this session, but it was really very frail ocean freight industry. If you think about it, that industry now only really makes money when they sell 90% full. So when their demand all of a sudden, you know, just like that increase north of 30%, there was no headroom to absorb.

So who knew that? Who knew that that was going to be, you know, something you have to deal with? It was really unpredictable. Now, if you take that same type of situation, you know, and you apply it to industrial suppliers, no one was really ready for the spike in demand. Uncertainty and fear of the unknown caused many feedstock suppliers to take cover, ratchet down and kill production lines, and cancel orders with their suppliers.

So that really constrained the supply chain to the point that no one was ready to absorb, you know, the incremental demand. So as we started to dig into delivery issues and force measures, it became very clear that the issue was not always with our suppliers. It didn’t mean that our suppliers had, you know, killed production lines or stopped buying materials or anything like that, but rather it had to do with a couple of levels below their supplier suppliers and maybe even another tier below.

So what we had to do, we had to leverage the strategic relationships that we had been grooming for many, many years to convince suppliers to open up and share their challenges. Then we had to make some tough choices and step in to resolve some of those suppliers’ issues in areas where we had maybe better leverage like transportation, for example.

We also had to closely examine our specs and qualify alternative materials because what we were buying for wasn’t available or maybe a component one of our suppliers was using in the material that they were preparing for us wasn’t available. So we had to make those material classification choices, obviously still meeting our customer requirements, but it did give us some breathing room.

We also qualified additional sources of supply, and this really impacted some of our long-term partners because it ended up reducing their overall business with Corning because they weren’t able to do it to suppliers. And these were some very tough choices that we had to make, mainly just to stay above water. But we couldn’t have done it without the engagement of our suppliers and also the support from Corning’s leadership.

How did you build such good relationships with your suppliers?

Well, so I don’t know. I guess, some I’m a bit old fashioned, you know, when it comes to supplier relationships, but, you know, yes, we have contracts in place, but there’s an element of trust. There’s an element of transparency, communication that you just cannot put in a contract, and those are the, I guess, the soft skills or the soft aspects of the relationship that really allowed us to navigate through some of these tough spots.

Even before there was this scare of a pandemic, one of the things that I would do regularly with my team is try to identify which relationships do we hit that we need to improve on with our suppliers – which ones were our critical suppliers, strategic suppliers, and making sure that we were driving focus, you know, towards those relationships. To make sure that in the event that something happened, we would be in a much better position so there was a lot of work that happened. Let’s say starting six years ago when I started out at Corning and kept on through, you know, all the way before COVID and even through COVID, that allowed us to navigate through these stuff waters.

One of the things that you told me you do a lot of is negotiate long-term contracts. Why is this?

So, when I think of long-term contracts, they’re really reserved for strategic partners that provide significant value to our products and are well aligned with our view of what it means to be a partner. Right. So, you’ve got a transactional type of relationship. You have strategic relationships. So there needs to be an alignment in terms of how suppliers view a partnership in order for us to even contemplate the long-term contracts with our suppliers.

So when negotiating long-term contracts, I really focus on the supplier’s ability to match Corning’s drive for growth as well as flexibility. And much like other B2B companies, we rely on forecasts from customers which often change, and those changes that can lead to disruptions in material planning or revenue forecasts, etc. So, I like to be upfront with the suppliers and go into as much detail as possible to explain the nature of the optical fiber and cable business. So they understand that there is a degree of risk that’s inherent in the relationship, which you all need to acknowledge first of all, and have the adequate means to navigate through those situations when they do occur. In my experience, going into a long-term contract negotiation with only price in mind will be a losing proposition for both parties, not just one party. Right, but for both parties. Ultimately, the contract should reflect both parties’ vested interests in each other’s success.

What is a long-term contract? When you say long term, what does that mean?

So typically a long-term contract for us would be three years and above. So it’s really three to five years. Two, three, seven years is what we call a long-term contract.

Where’s the best place to start with a long-term contract negotiation?

I’d say the best place to start is by the two parties exchanging a simple sheet that outlines what is important for each party beyond the obvious price and volume, of course. So, for example, is co-investment in dedicated capacity important? Headroom, right. Which is I know you’re familiar with the term, but when we say headroom, we are not corny, we mean which the ability for a supplier to flex up in capacity consignment or VMI payment terms, etc.

So, I think that sets the stage with high-level expectations, and that opens up the field for negotiation along the lines of relevant topics. Understanding what’s important right in the beginning is key. And I’m a big proponent of keeping the legal counsel until the end, after we negotiate what the commercial terms are and what’s important.

Then we bring in the legal counsel to do some additional reviews, recommendation issues, and finalizing the contract, but it’s very important to have that initial step between the two parties where everything is very clear as to what we’re trying to achieve.

How long does it take to set up a long-term contract from start to finish?

Well, that really depends. It depends a lot on how complex the commodity is that we’re trying to negotiate on. It depends on the length of the contract, I think has something to do with how long it’ll take to negotiate. Obviously, the longer the contract, the more you’re going to go back and forth on clauses, etc.

But I would say, you know, if you’re able to negotiate a long-term contract in six months, that’s probably a good place to start. In terms of, you know, what would I call it? Good. I’d say six months or less would be good. I’ve been in contract negotiations that lasted a year, a year and a half.

And we keep basically, you know, putting temporary letters of intent in place, kind of kicking the ball down the field or kicking the can down the road until finally able to put a contract in place. So it really depends, but if somebody is looking for a number that they should shoot for, I’d say under six months.

What data points do you make sure to include in your long-term contracts?

So in the long-term contract, we want to make sure that, obviously, beyond just the expectations for volume and price, it’s really important to have provisions in place that allow for both parties to resolve a dispute, whether it is related to quality or delivery or whatever, you know, in a way that keeps litigation or mediation outside of the scope of how to resolve those issues.

So that’s why I think it is really important expectation in long-term contracts. Also, expectations around obviously quality delivery. It’s extremely important, especially because typically in a long-term contract, you’re going to be allocating quite a bit of your demand to a single supplier or maybe a course of suppliers. And you want to make sure that you are protecting your operation as much as possible from that aspect.

How do you know if you’ve set up a successful long-term contract?

So, since no one has a crystal ball, a successful contract is not maybe it’s not really fully known when you sign it, right? Obviously, signing a contract, a long-term contract is a big achievement, and you may have a pretty good idea, but it hasn’t been battle-tested. Right? The contract has not been battle-tested yet.

So, I believe success is achieved by how the two parties really navigate through those unexpected situations. So, for example, when a supplier states that they are being forced to allocate supply due to material or production challenges, how well positioned are you with respect to other customers of that supplier? If your allocation is higher than others because of a specific volume commitment that is stated in the contract, that can be one example of success.

Another example would be, as I mentioned before, negotiating clauses that allow for an organized resolution of disputes related to quality, delivery, etc. in a way that is fair for both parties, without having to resort to litigation or mediation. That’s also my definition of a successful long-term contract.

So, the contract is executed. What happens next?

Once the contract is executed, it’s really about managing that contract, making sure that both parties are abiding by what’s been agreed upon. And that is something that requires ongoing monitoring of the specifics of the contract. While volume and pricing are typically spelled out in the purchase orders, it’s important to make sure that the supplier is delivering on time, and any kind of vessels that have been stipulated in the long-term contract should be monitored. There should be periodic reviews with the supplier to ensure that everything is being discussed, room for improvement is identified, and what’s working and what’s not working are reviewed because while it is a static document, there’s a living aspect of how you manage the contract that needs to be put in place. At least quarterly business reviews are especially important for strategic suppliers that have long-term contracts in place.

Supplier relationship management after the long-term contract has been executed is really important. I know it’s been part of your tremendous success in your career and helping your team and the companies that you worked for. What is a learning that you’ve had about what it takes to have a successful supplier relationship management program?

So there are a couple of aspects of a supplier relationship management program that are important to consider. So, one of them, it’s critical that as an organization, or as a person in an organization, you understand how to segment your suppliers. You need to be very clear which ones are strategic versus which ones are not, which ones you’re going to focus on putting in long-term contracts versus just managing the release of the purchase orders.

So, having that initial step of being very clear on the segmentation, I think it’s important also when you think about that, say that you carve out the strategic suppliers, the core suppliers, maybe call it the top 20 or top 30, however you want to dimension it. But I think it’s also important to have some level of executive leadership exposure to those suppliers, especially within the business.

And the reason why I think that’s important is because managing their relationship with a supplier, it’s not always isolated to just the individual strategic sourcing manager to negotiate the contract. You’re going to have buyers at the plants, you’re going to have maybe from time to time, finance being involved, legal, but also some of the executives that you know, the general manager of a division, for example, they may have a vested interest in developing a relationship with a supplier, especially when things get a little challenging where maybe we’re not able to resolve it purely from a strategic sourcing aspect.

And we want to have maybe the executives of those of the supplier in the company connect and have some additional dialog. So, high-level, I mean, those are the things that I’ve learned that make a difference. Obviously, I’m thinking of things that are maybe less obvious. Obviously, you have to have the QBRs, you have to have the SLAs managed on an ongoing basis.

But it’s some of these little things that I think are equally important and sometimes even more important when we face situations such as we’re facing right now with supply chain challenges.

Can you share a story or example about a time when you or your team totally missed the mark on supplier relationship management and it negatively impacted your business?

Yes, yes. So, we had a supplier. This was a long-term supplier. I mean, we had been working with this supplier for over a decade, I think, and it was one of those relationships where the relationship was so good that no one ever felt like we needed to put a long-term contract in place.

We were single-sourced for a couple of parts with this particular supplier, and no one ever focused on that specific supplier. There was a focus on other suppliers, but this would never really bubble to the top as a risk. And during COVID, this particular supplier decided to exit from the optical fiber and cable segment of products that they made because they were shifting all the resources and focus towards medical devices.

And basically, they gave us a call and told us that they were changing directions. And I think they gave us a couple of weeks to figure out what we were going to do, and that was unexpected. We never saw that coming, and it was very challenging. We had to scramble to find alternate suppliers, qualify established new relationships, etc., and it could have been avoided if we had taken a different approach if we maybe had an agreement in place that specifically called out for a certain amount of time before they sunset parts.

It would have been helpful, maybe like a last-time buy period, that was in the contract. That would have been helpful. And even having the division multi-source versus just being single-source with a lot of these parts, that was a big learning experience for the team.

You just mentioned multi-sourcing. What does that mean to you, and how have you been able to multi-source this year?

Sure. So, multi-sourcing. Basically, it’s making sure that you’ve got multiple suppliers that can provide that specific part or material, or, you know, according to the specs. And the way that I approached it when I first came into Corning, we did an analysis to understand where we were single source or sole source. And we dedicated quite a bit of time. You know, every year, we carve out time to make sure that we work on those parts that are a single source or sole source because those tend to be flagged as high-risk parts. And so, it’s been an ongoing process.

So every year, you know, we take a bite out of that single-source pool of materials. And we’ve been able to significantly reduce the single-source parts. I think that I can’t recall what the latest number is, but I think that we reduced, we cut the single-source forest by 40 or 50% in the last three years or so.

So that has been, you know, one of the success factors that allowed us to navigate through some of these COVID challenges that we’ve had. It hasn’t been perfect. But it would have been a lot worse if we hadn’t paid attention to that situation.

Alex, if people want to connect with you, where do you want to send them? LinkedIn?

LinkedIn, I think it’s the best way. I’m on LinkedIn, you know, and I can provide my email address as well so people can reach out to me.

Thanks for discussing how to negotiate optimal long-term direct materials contracts with us today, Alex. If you’ve missed anything, you can check out the show notes. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct spent supply chain content. I’m @SarahScudder on LinkedIn and @SScudder on Twitter.

This brings us to the end of another episode of What The Duck, another Supply Chain podcast. I’m your host, Sarah Scudder. I will be back next week.