Reasons To Exit Suppliers
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Exiting or terminating supplier contracts should not be done lightly. If you have been working with a supplier for a long time, then there is a loss (and sometimes cost) associated with ending any contract with a supplier, and in some cases commercial agreements can make it complex. So it is always best to end supplier contracts as a last resort only; not on a routine basis and when you want to terminate be sure of your legal position.
However, there are some instances where terminating with a supplier is a logical option for example
Failure to meet contractual terms of supply
The most common reason for terminating with a supplier is failure to meet the terms of the contract – this could be anything from being unable to supply the goods through to a myriad of other issues.
Supplier Changes
Many suppliers are fairly stable and carry on for years without change. But often suppliers can face upheaval. So you may have been doing business with Supplier A for a number of years. Then they find themselves being subject to a hostile takeover by Company B. At first things progress normally, but then you find that the supplier does not meet its contractual obligations or no longer wants to manufacture that product.
Defective Products
Defects are a huge problem within the manufacturing process. If sub-standard raw materials or products are provided then the manufacturing process can be delayed by machinery becoming ‘clogged’ or by the defect rate of the finished product becoming too high and re-manufacturing has to take place.
Although it is unlikely that any supplier will ever be able to provide 100% perfect goods on a 24/7 basis, 365 days a year. But if you find that there is a constant problem with defective goods then it is worth thinking about the role that the supplier has in the problem
Cost
Given that we now live in a global village with lots of new markets opening up on an almost daily basis there are new suppliers popping up at a similar rate. So if you find that you can purchase items cheaper elsewhere then that is certainly reason to consider your position. Commercial terms may prevent you from terminating due to price only but you may have grounds within the contract to look at the market position to influence the incumbent supplier.
Late Delivery
Late delivery can be a major headache. Given that there are times when even with the best will in the world, it will be impossible for suppliers to meet deadlines, there are other times when the suppliers simply seem to not care about whether or not they meet deadlines. This is common grounds to look for an alternate supplier. Delivery performance can be an emotive subject and close attention needs to be paid to accuracy of the data and route cause of the problem.
Service
If you find that suppliers are not treating you as a valued customers and are not responsive to any complaints or fail to address any issues that you have raised.
Avoidance of Termination
Although you should not feel that you are simply ‘stuck’ with a supplier, if you are considering terminating a contract with a supplier, especially one that is a long standing supplier, it may be worth approaching the supplier to try to persuade them to rectify the problem.
Sometimes if a supplier is aware that you will terminate the contract unless the problem is rectified it can act as a catalyst for them to take immediate action and ensure that you will soon be satisfied with the relationship!
If you do not have a supplier ready and waiting to take over provision of your supplies then you will experience at least some operational difficulties. Remember that you will possibly have to get used to how they operate, their new processes and procedures and so on, so the process of switching suppliers can be expensive!
Due consideration of the commercial agreement is vital, getting this wrong can open up all sorts of potential penalties. Inclusion of a termination clause in your contract can be a start – clearly articulating the reasons why a termination may be valid and be executed.
Is it Possible To Eradicate Stock Outs?
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There have been significant developments made to supply chains over the last 10 or 20 years. Gone are the days when the supplier was (metaphorically at least) beaten with a stick in order to provide supplies at the lowest possible cost. Now the emphasis is on building strong relationships with suppliers, ensuring that the relationships are effective and mutually beneficial. So does this mean that there are now no obstacles to the supply chain; indeed can stock outs now be considered a thing of the past?
Risks To The Supply Chain
Well, it may be tempting to think that with the correct strategies and with excellent supplier relationships, there will be no stock outs. After all, isn’t that the ideal that we should all be striving for? Yet in reality we live in a world where there can be events that can dramatically affect the supply chain. Although everything to do with the supply chain can be, and indeed has to be managed, there is always a risk that things can go wrong.
For example, who could have predicted that a volcano erupting in Iceland would cripple the whole of Europe by grounding all aeroplanes for 2 weeks in April 2010 with further flight disruptions experienced in May 2010? This had an effect on supply chains all over the world, because although many items are still shipped, some vital components or parts may be sent by air.
In addition other external factors, such as acts of terrorism, strikes, acts of God and so on, can seriously affect the supply chain and lead to stock outs despite the best planning and management of stock.
Historic Perspective
Historically the risk of stock outs was kept low by having slack when it came to inventory. So inventory or stock was kept on site, meaning that there was always enough to meet supply demands, even if that demand fluctuated wildly. It was similar to someone keeping a fridge well stocked, in case a sudden influx of visitors arrived.
However, along came Lean thinking and suddenly too much slack with regard to stock was a bad thing; after all, resources had to be used to house the stock, heating and lighting used to make sure it was kept in good condition and it had to be checked and protected from theft. So stock levels were dramatically reduced within many organisations; then a new risk evolved, that of stock outs!
Stock outs will always be a risk, but experts advise that the trick is to manage the risk and ensure that the risks are minimised. Yes an ‘Act of God’ may take place and create a stock out, but on the other hand stock outs should not be caused by internal methods and practices.
Risk Management
Adopting a strategic procurement plan, with robust supplier management, will ensure that the risks of stock outs are minimised, as will robust planning and due consideration of safety stock requirements – By ensuring that a comprehensive and systematic approach is taken to all supply chain issues from the geographic location of stores and suppliers through to carrying out supplier development and improvement activity supply chain risks can be better understood and managed.