Prime Advantage has invited industry experts to share their insights on the present and future of manufacturing and business success. In this post, Shayla Price, a B2B Content Marketer, discusses how to create contracts where all parties involved can prosper. Disclaimer: The information below isn't legal advice. Seek an attorney before making any legal decisions.
For manufacturers, reliability is paramount among their suppliers.
According to Aberdeen, 70% of enterprises say that measuring supplier performance is critical or highly important to their success. A manufacturing enterprise cannot sustain without competent, dependable suppliers.
Supplier performance stems from successful relationships. And those relationships develop through effective communication, along with a well-defined contract.
But learn to focus on the people, not the legalese. And simplicity isn't the only way to generate performance from your contracts. You also need communication, provisions for unforeseen events, and regular audits.
Strive For Open Communication
Nothing derails a relationship like contradiction and uncertainty. If you want your suppliers to work at their highest level, it's time to open the lines of communication.
Set communication policies and guidelines on how your team will interact with suppliers. Before discussing any contract, make sure all stakeholders understand the deliverables and the ramifications if those goals aren't satisfied.
In the late 90s, American car manufacturers noticed that Japanese companies achieved phenomenal performance from their suppliers. That performance stemmed from the way the Japanese businesses invested in their supplier relationships. Open communication and trust translated to faster development and more supplier innovations.
Of course, the American companies wanted the same results. So, they tried to superficially copy the Japanese model. They worked with fewer suppliers and offered long-term contracts to high performers.
However, it wasn't until the early 2000s that American companies started creating real partnerships. By prioritizing communication, these manufacturers saw dramatic improvements in supplier performance, including improved direct labor efficiency and reduced defects in materials.
If your company is currently struggling with supplier communication, take small steps toward building a relationship. This can translate into better supplier performance.
Draft With The Future In Mind
Contracts should be straightforward for both parties to understand. Moreover, these legal documents should contain provisions that include future changes that may impact your business with the supplier.
Leadership is one of the most common unforeseen complications in an agreement. What happens if another business entity acquires your supplier?
Laura Fagundes, marketing director at ContractWorks, says, "It's wise to future-proof the contract to prepare for these possibilities in advance. Include a clause allowing one or both parties to cancel an existing contract in the event there are major leadership changes."
Be mindful to insert contract clauses for catastrophes, too. This may involve environmental clauses to cover issues with sourcing materials or economic clauses to protect parties during a global crisis.
Future proofing helps protect you. And it also shows suppliers you have reasonable expectations.
Audit Contract Performance
According to PricewaterhouseCoopers, the average Fortune 2000 company has 20,000-40,000 active contracts. No wonder, so many companies don't maintain their contracts properly.
If you want high-performing contracts, you need to audit contract performance. Realize that suppliers aren't surprised or offended by sudden audits or performance reviews.
It's an opportunity to offer constructive criticism or amend your terms. Audits help suppliers serve your company's needs.
In some cases, you will discover that a contract is underperforming. Analyze the situation on a case-by-case basis. The best scenario occurs when the supplier makes all the necessary changes. But sometimes, you may need to end the relationship and search for a new supplier.
Whether contracts are performing well or not, regular audits can help you make the right business decisions.
As a manufacturer, supplier performance is an integral part of your business. So, build quality relationships to boost supplier performance.
Do you have any contract tips that have helped your business? Share them in the comments below.