Why You Need To Renegotiate Supplier Contracts Now
The New Normal
As businesses slowly start to re-open, the reality is we are not going to back to the normal we knew before COVID-19 anytime soon, if ever. You have heard it many times now; “The New Normal” is being created as we speak; virtual work, social distancing, staggered work shifts and personal protective equipment for non-healthcare settings are all being figured out and defined as we speak.
Words like “Supply Chain” and “Procurement” relatively unknown by the average Canadian are now becoming commonplace and gaining more awareness for their criticality and fragility yet vital to keeping the economy and yes, essential services like health care going.
What about the average business? Isn’t the Supply Chain and Procurement important for them? The answer is YES, it always has been but, with the exception perhaps of large enterprise (even that is debatable), no one paid much attention until now, or if they did, it wasn’t with an eye to being so business critical.
Read the Fine Print Now
If you have not thought about it, you need to and more importantly, you need to read the fine print now. I am talking about your supply contracts. If we are going to get this economy firing on all cylinders again, we need to ensure the supply of goods and services is flowing and that your relationship with your supplier is good because you absolutely are going to need them as much as they will need you, now more than ever. We truly are all in this together.
You need to review your contracts now and prioritize those that are mission critical to your business. You need to ensure you have the optimum terms and conditions that are relevant for your business now. Not when they were negotiated last year or even before that. Things have changed and, in some cases, dramatically.
You need to work with your supplier very closely so that your contracts and the relationship itself, reflect “The New Normal”. Supply disruption and risk is all but certain to continue and to be expected, regardless of your business. You need to shore up contracts and relationships now. What does your contract stipulate about supply disruption and prioritization, termination, limit of liability? Do you even have a force majeure clause? Should you use it? It works both ways, so you need to talk to your suppliers about how to address these terms and conditions to benefit and protect both parties. They need to be fair, balanced, and relevant to our current times.
Supplier Relationships Will Be Strained
Supplier and customer relationships are and will continue to be strained, think about Personal Protective Equipment (PPE) and how suppliers like 3M are dealing with the overwhelming demand for their products even having governments around the globe jousting with each other and applying pressure for prioritization even exclusivity.
Your products or services may not be life saving PPE but what about toilet paper? Not a true essential but surely a much-appreciated luxury, companies have depleted their reserves and cannot manufacture fast enough. Store shelves once stocked with toilet paper remain empty along with hand-sanitizer and disinfecting wipes.
Food and beverages will also continue to see an impact as farmers struggle to secure foreign workers to plant. What happens if there is a second wave during harvest time? Will crops be left rotting in the fields? Already labour shortages or decline in demand have seen food literally going to waste or being donated to food banks. The labour shortage now and during critical times will need to be addressed. What is not so obvious or understood is the fragility of the supply chain and how certain impacts can have up stream and downstream impacts.
Now take the average business. You are not essential right? Supply chain disruption does not affect you right? You may think your will come out of this unscathed right? Wrong! You are vulnerable as well. If you are selling products, reliance on imports from the US and China, logistics, raw materials even labour can and will in some way be impacted. So how do you prepare?
Renegotiate Your Supply Contracts Now.
- Prioritize contracts that are mission critical to keeping your business going.
- Review those contracts for terms and conditions that need to be updated to fit the new normal. Exclusivity, Termination, Penalties, Force Majeure to name just a few.
- Conduct market research to assess alternative sources of supply including domestic suppliers if your current suppliers are outside of Canada. Even if they have an office in Canada, if they import from foreign locations; US or China for example, you are vulnerable. Assess what is happening with the supplier you will be negotiating with. Are they financially stable, stressed, on the verge of bankruptcy or being acquired?
- Prepare your negotiations strategy. What terms and conditions need to be negotiated, what is the ideal vs absolute fall back (best alternative to no agreement or BATNA). What are you willing to give up to get or “link and trade”? What leverage opportunities to do you have? What is happening to prices for the goods or services you are buying? Are prices increasing, decreasing? What contractual protections to you have in place to not secure supply but to protect you from sky rocketing prices due to demand?
- Conduct your negotiations. Decide who is negotiating, find out who will be negotiating on behalf of the supplier. Using your negotiations strategy, strive for a fair and balanced agreement at fair market prices that protect you against disruption and exorbitant increases. The laws of supply and demand will prevail. Price gauging is called leverage if the supply is low and demand is high.
- Following negotiations, put in place a supplier relationship management (SRM) or Contract Governance framework. Do not just throw your contracts in a drawer. You need to track the deliverables and service levels agreed to in the contract. You need to nurture the relationship if mission critical, to ensure supply and to react to market disruptions that are sure to continue.
ProcurePro can help. We have decades of experience negotiating contracts for clients and are experts in Procurement and Supply Chain. Contact us to day to discuss your challenges and how me can help. By email to firstname.lastname@example.org, telephone 416-505-8698 or for more information on ProcurePro Consulting checkout our website www.ProcurePro.ca