It’s not me its you. Exiting a supplier? Here’s some things you’ll want to think about
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You know how it is, in the early days you’re flushed with enthusiasm, their product is fantastic and the sales guy has showered you with their plans for how your the number one client and they think you’re amazing and they see a bright collaborative future together.
Further down the line and all those things become a distant memory. Perhaps their performance doesn’t meet your requirements – perhaps the product is tired and there is a new kid on the block, perhaps they are not as cost effective as they once were. Whatever the reason it’s time to exit the supplier.
Most organizations have two forms of supplier relationship:
* Informal supply – ie ad-hoc procurement outside the bounds (other than the purchase order) of a formal commercial agreement – ie a distributor whom you raise ad hoc requirements against but have no formal commercial agreement
* Formal supply – a commercial agreement is in place and/or statement of work
Both types require some strategic thinking:
When starting out with a supplier it may not seem the time to focus on potential exit agreements, but this is the best time to be thinking of that potential outcome. If you leave it to when you are exiting the relationship or on expiration of an existing commercial agreement, things may not work out so well for you. Indeed, if the correct framework isn’t in place it can become a tortuous process particularly if your calling your supplier into breach.
So what is there to consider? There may be a variety of issues depending on the type of service/component that your purchasing. The key things to consider usually contain the following:
1/. What assistance is required from the supplier during the exit process.
2/ Is there a commercial settlement – ie a termination fee as part of your contract or is there likely to be one?
3/ Is anything required by the buyer to continue business post exit, ie tooling, proprietary knowledge, people etc. If so is it hard/easy to obtain?
4/ Does the buyer need any particular rights of access post exit –for example for hiring labor by the buyer from the previous supplier.
Remember you’re looking for a smooth (and easy) transition. Consider upfront what you may need to put in place for that. Getting this wrong will likely resolve in a much higher termination settlement or costs than if it’s pre planned.
It’s unlikely in reality that you’ll consider all exit requirements at contract signature, you simply may not be aware of things or you may not be able to reach agreement. Therefore aim to use the initial agreement to set out the minimum requirements. Do this in as much detail as you are able and establish an action/ obligation on the buyer and seller to periodically update that exit plan adding further detail when it becomes known (An ideal action for your quarterly business reviews)
Irrespective of any commercial framework as a buyer you can also protect your organization by aiming to capture and retain knowledge of the product/service supplied.
Breaking up is always hard to do. In the world of supply chain it remains a common but for the most part challenging process. The more effort you put up front the easier it should be.
Have you had to exit a supplier? Any tips and tricks you’d like to share with our readership? Please use the comments section below.