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Will new technology mean the end of term agreements?

August 31, 2018

At a recent IACCM roundtable, participants discussed the seemingly insoluble issue of maximising value from supply relationships. It was widely agreed that loyalty and collaboration are important characteristics, since they support more open communication and opportunity evaluation. Yet loyalty and collaboration depend on levels of long-term trust and integrity that are rarely achieved. The key issues – especially for buyers – are ‘How do I stop suppliers taking advantage of me and how do I ensure I’m not overpaying or missing out on innovation?’

These questions are typically answered today by the use of regular competitive bids and, to a growing degree, through maintaining a market overview by Category Management teams. The problem is that competitive bidding – rather than keeping suppliers committed to value – actually tends to undermine performance. As with any relationship, behavior is impacted by the sense of durability.

Setting the term

This brings us to the point about a fixed contract term, something that is common in many agreements. In theory, the term sets a balance between the interests of buyer and supplier – long enough to make the supplier investment worthwhile, but not so long that the buyer feels trapped.

New technologies – and in particular new analytical tools – should have the potential to make fixed contract terms redundant. By aggregating all the elements of comparative operational cost (not just price), it ought to be possible to maintain dynamic benchmarks of supplier performance. As we all know, this is actually the critical data that represents a true measure of value. From a contract perspective, it would mean that there was objective assessment of the incumbent supplier and that they could be given clear improvement targets to retain the business.

Maintaining pressure on suppliers to perform is fair and reasonable. Using an arbitrary time period as the incentive is not only questionable in its effectiveness, but also imposes heavy cost burdens that ultimately translate into higher prices.

 

 

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