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Why Supply Chain Matters To Contracts Professionals

March 3, 2010

I have found most contract and commercial staff are supremely uninterested in supply chain management. Especially for those on the sell side of contracting, few see it as having direct relevance to their work; most view it as ‘something to do with logistics’. I think they are wrong and that supply chain should be a key area for focus by any self-respecting commercial organization.

An article in Strategy+Business, entitled ‘Virtuous Connections’, illustrates this point.  It tells a story that demonstrates the impact on customers of poorly managed supply networks. It also shows how a failure to properly understand and segment customers lies at the root of the problem. Here is an extract from the article:

“(The supply chain manager) began to implement (his) concept by tackling Chem One’s customer segmentation problem. At that time, the company didn’t prioritize its customers. Good customers, bad customers — large, small, loyal, or intermittent — all were equally important. If any of them asked for a product with rush delivery, Chem One’s service representatives would simply agree to it, without first considering the cost or the value to their own company. These rush orders upset the planning schedule and required manufacturing to shorten its production runs. The orders that had been delayed as a result of these sudden changes then became “rush” orders themselves, perpetuating planning instability and suboptimal manufacturing. Service levels declined, and costs increased.

To mitigate this situation, West and his team dug deep into Chem One’s sales records, analyzing each customer by its size, needs (for example, did it have a just-in-time system?), and strategic importance to Chem One, along with a few other variables. After this assessment and discussions with salespeople in the field, the team gave each customer a priority code. This code, in turn, dictated how its Chem One customer service representative would respond to its requests for rushed or changed orders. Immediately, unplanned deliveries were reduced significantly and customers were given a more realistic picture of product availability and shipment schedules.”

As contracting experts, is this not the sort of analysis we should have at our fingertips? As the people evaluating and making commitments, should we not be making decisions based on the relative value of customers? We enter into contracts to achieve mutual economic gain; how can we make risk and commitment decisions without visibility into the relative economic contribution of each customer or prospect?

I know that many contracts groups do attempt to segment the customer base, but I would suggest that the basis for segmentation is typically very rudimentary. It tends to be based on deal size, or the ‘strategic opportunity’ that the business perceives, rather than on any structured performance data. As a result, we often finish up offering the best terms to the lowest margin customers. We build in system disruptions for business that has relatively low value, and fail to understand how this will impact our more valuable customers.

The problem – in my experience – is that sales contracts and commercial groups operate on a deal to deal basis. They rarely have wider insights or understanding of customer portfolios. This distorts our understanding of the true impact of term and condition variations as well as our appreciation of risk. Through that wider understanding, we would do some things more often and others much less often. Supply chain insights and discipline would be an excellent way to start handling business opportunities and markets with greater sophistication – and to increase the value that we bring to the business.

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