The Intersection of Supply Chain Risk and Contract Management (Part 1)

Contracting and contract management is a function (and class of technology tools) that’s usually tossed aside when enabling capabilities for strategic sourcing, supplier management and supply risk programs. The true “getting to ink” on contracts with global suppliers often plays second fiddle to upfront negotiations and ongoing supplier management activities (like on-boarding, implementation, auditing, etc.)

Yet there’s an argument that a failure of contract management is at the very forefront of many of the supply chain risk elements we face today (above and beyond supplier financial risk, although that, too, can be addressed with new, creative approaches to contracting tied into clauses linked to KPIs and related metrics in the supplier monitoring process – more on that some other time). Consider the case of the horsemeat scandal that's trotted its way through the UK and now the rest of Europe.

Supply Chain Digest recently did a good job of summarizing the financial and physical flow of horsemeat throughout the food supply chain here:

Most of the tainted meat came from Silvercrest Foods, a subsidiary of ABP Food Group. But Silvercrest may itself have been duped by slaughterhouses in other parts of Europe, including Poland, that were supposed to deliver ground beef but at best for a period delivered a beef-horse mean blend … Another thread says tier 1 supplier Comigel received orders from some food manufacturers and had Tavola, its subsidiary in Luxembourg, source the products. Tavola placed an order for the meat with Spanghero, in the south of France, which contacted a Cypriot trader, who subcontracted a Dutch trader. That company placed an order with slaughterhouses in Romania, which sent the meat to Spanghero.

SCD further clarifies the “pattern” of the supply chain flow noting that it’s similar to the apparel industry. To wit, “tier 1 supplier receives the order from the retailer or manufacturers, then flexibly sources the product from tier 2 or 3 suppliers, with the original company being simply unaware of the actual source of the product they are buying, as the tier 1 supplier arbitrages price and delivery depending on market conditions.”

It’s worth reading the whole Supply Chain Digest article. It summarizes many of the supply chain risk incidents that have resulted from a failure of procurement and supplier management in recent years. In the next installment in this series, we’ll consider how contract management can be a secret weapon in heading off supply chain risk elements before they ultimate come home to roost – or neigh, as the case may be.

Voices (2)

  1. Kent Handelsman:

    Things that look and sound too good to be true generally are. Prove to your suppliers that they do not matter by only caring about your own metrics and they will follow suit or simply blow you off. Awarding business and getting around to closing on the paper later is simply bad practice by all concerned — especially when the delays are due to rough terms the parties are not coming together on. All leverage is done when the work commences… Ignore that at your peril!

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