In many supplier - customer relationships, the contract provides a significant focus. Some organisations have a strong approach to managing the outcomes of the contract and in some cases, this drives the entire focus of the organisation, both in terms of contract creation and in the way in which focus is directed during the delivery of the contracted goods and services.
This focus on contract often begins when there have been previous performance issues. In an effort to control performance, great attention is placed on delivery to specific contract clauses, and in creating a very controlled contract and outcomes from the contract.
This creates two specific issues. The first is in creating a tightly controlled contract in an environment where the requirements are partially known (which is the majority of contracts). The second is managing tightly to the contract and neglecting the relationship with the supplier.
When we have an imprecise set of requirements (and volume is a repeating area of uncertainty in many contracts), it is hard to create an absolutely defined contract, as we need to have flexibility to allow for uncertainty. If we create a tightly defined contract within uncertain boundaries, then the likelihood is that we will have a challenge when the flexibility we need is applied (as it is likely to be outside the contract clauses). The more tightly we define a contract, then the less option for flexibility exists.
This may work if the will to reach an outcome has been developed in a well-managed relationship with the supplier. This means that we are open to development and improvement within that relationship, which seeks to optimise the outcomes achieved for both businesses, typically across a range of contracts.
This suggests that we need to have in place a well-managed and structured relationship for the significant contracts and suppliers (not for every contract- we would quickly run out of resource). This suggests that we need to have good quality supplier segmentation in place, blended with contract segmentation, to make sure the critical areas are well covered. To be clear, these suppliers are not always going to be strategic suppliers, but are certainly going to be important. We also need to make sure the Key Performance Indicators in place are relevant not only to supplier performance, but also to the performance expected of significant contracts.
By addressing both the relationship and the contract, we have the opportunity to ensure that the correct balance is struck, and it allows us to address areas which are outside of current contractual requirements.
Of course, it is possible to contract for relationship development and flexibility, but the lawyers will often be uncomfortable with imprecise language and flexibility. This is why we need to make sure the balance between the three areas of contract, relationship and flexibility is correct.
Tagged by topic: Supplier Management