10 November 2008
What is the best approach for managing contracts and supplier relationships in the worsening economic climate? Paul Snell gets an overview from buyers
Poor economic conditions are placing buyers between a rock and hard place when managing suppliers. The need for the business to hold on to money for as long as possible has to be balanced with demands from suppliers to get their hands on it as quickly as they can, for the same reason.
Although some companies in sectors such as construction and retail have imposed unilateral cuts on contract prices and increases in payment terms for vendors, others - such as automotive, electronic manufacturing, local authorities and central government - have been speeding up payments and settling in cash to help suppliers out.
But in the current economic situation which is the best approach, carrot or stick? The majority disagree with an aggressive approach, believing it to be a short-term fix only.
"It always comes back to bite you," says Heather Rodgers, head of procurement and supplier relationship management at Centrica. "We put a lot of time and energy into our key suppliers. They almost become an extension of our business and they are there in good and bad times."
And for some, such as QinetiQ's commercial director Chris Mead, who is reliant on numerous single-source suppliers, sending a "tersely worded e-mail" of demands is not an option.
But assisting suppliers can be equally difficult. Roger West, procurement director for NHS Supply Chain, says paying suppliers within 10 days - earlier than currently - would require a "staggering" cash flow.
Other purchasers are taking a more subtle approach.
"We are seeing a trend whereby there is more forensic analysis of long-term deals going on, with a view of working out whether what is provided is what is contracted for. It's not quite as draconian, but looking for ammunition to achieve the same end," says Paul Cinnamond, director at consultancy Blake Newport.
Tim Cummins, CEO of the International Association for Contract and Commercial Management, believes buyers should be looking for some kind of "balanced renegotiation". He says: "In many respects I see it as unethical not to renegotiate contracts. In the sense that the contract's purpose is to give both sides a reasonable basis for planning based upon the commitments and responsibilities they are able to assume at that time."
Cinnamond adds that a relationship-based approach would prevent a return to a practice that appeared during the last recession - suppliers agreeing to contracts to guarantee turnover, and then complaining and delivering the minimum when they are unable to make decent money.
"If [buyers] have sensible commercial conversations with suppliers and set sensible prices, that won't happen."
Purchasers also believe the profession should be more proactive at checking the financial health of suppliers throughout their relationships, and not only at the start.
"We tend to be quite good on the upfront financial due diligence, but it's not a discipline and we need that ongoing now," says Colin Davies, senior director, worldwide procurement at drug company Pfizer. An ongoing system of checks would allow buyers to see earlier if suppliers were running into trouble, or needed assistance, and help them to act.
But Cummins believes the whole contracting process may need to be revised in light of the current situation.
"The global economy has brought with it a dramatic increase in the frequency and nature of change, yet many of the ways we go about contracting in particular remain very much unaltered," he says.
"Contracts aren't about getting a document signed and sticking it in a drawer. It's about having a living framework for relationship governance."