Contracting Excellence Magazine - Mar 2012
Building The Link Between Supply Chains & Contract Management
Managing supply chain risk depends on increased levels of partnering. Suppliers who can demonstrate their superior capabilities will have a source of competitive advantage - and two of the key ways capability is demonstrated are through the approach to negotiation and the integrity of post-award contract management.
For those in Procurement, the volatility and uncertainties of today's markets demand a move away from the simplistic price-driven model of recent years. Supplier selection has to adapt, taking account of operational and cultural fit between organizations and the resultant quality of the relationship. Risk management must be viewed with far more subtlety than the current approach of risk allocation and compliance.
This quote from a recent article by Mark Pearson, Managing Director of the Operations Consulting practice at Accenture, sums it up well. “Most of our existing supply-chain strategies were conceived with the assumption of stability, and designed to plan, produce and deliver on a just-in-time basis, thus assuring lean operations and inventory. In this environment, the supply chain was predominantly viewed as a lever to reduce costs.
Today, companies with such rigid supply chains are unable to keep pace with the current pace of change, which also impacts the dexterity with which they can deliver new products to market.”
Many contracts and commercial professionals see supply chain as something that has little relevance to them. They think of it as another term for Procurement or Logistics. Think again - because it lies right at the heart of your future.
Today's commercial and contracts experts must have a grasp not only of what commitments are needed, but also whether they are sustainable. Your work is increasingly about the delivery of terms that reflect quality - the factors that build trust, ensure end-user satisfaction, gain repeat business and support greater collaboration.
Our understanding of the purpose of contracts and negotiations needs to shift from a focus on limitations to an understanding of the relationship required to meet market and business needs. Risk management must transform from being simply an analysis of the risks associated with making a commitment, to an understanding of the risks of NOT making that commitment.
For example, when compiling or evaluating a contract, both sides must consider what terms are needed to ensure end-user requirements are met. If customer demands are for faster on-boarding, what capabilities are needed to meet that need? If inaccurate or opaque billing has been a regular source of complaint, what must we do to fix this issue and avoid dissatisfaction? If performance measures have traditionally resulted in contention, what approaches will result in more collaborative behaviors?
Each of these questions is actually a supply chain issue. Our customers – internal and external – want supply relationships that deliver the ability to win in today's volatile markets. This can be achieved only through a re-focusing of today's contract models, negotiations and post-award practices.
Contract & Commercial Management: Operational Guide
The Definitive Guide to Commercial Contracting
We are excited to announce that IACCM's groundbreaking commercial contracting guide - the first global work of its kind - is now available.
Secure your copy of Contract & Commercial Management: The Operational Guide today - and find out why this highly recommended title is being called 'a great catch all book that can be referred to by both sell and buy side for worldwide contracts', that will 'serve as a reference handbook throughout a career'. The definitive work on contracting and commercial best practice provides a comprehensive overview of the entire contract life-cycle over more than 500 pages of detailed insight.
The Operational Guide is a unique work, addressing contract and commercial principles on a worldwide basis, for both buy-side and sell-side practitioners. Invaluable for training, as a reference work, or simply to update your understanding of current practices, this is a volume that you really must own!
For more details and to order online, please go to:
Making Contracts Work
IACCM Proactive Law Group's Helena Haapio recognized at leading European conference
IACCM member and leader of the Proactive Law group, Helena Haapio, was selected as a finalist for the LexisNexis Best Paper Awards 2012, and her paper achieved a top three position. This achievement reflects the growing international recognition that traditional contract practices must change in order to make contracts more understandable - and thereby far better at managing risk.
Held at the recent IRIS 2012 Conference in Salzburg, the judging panel recognized Helena's paper, entitled 'Making Contracts Work for Clients; towards Greater Clarity and Usability', as one of the top three entries.
In the paper, Helena writes that 'while some contracts may need to work as evidence in court, most contracts do not. Instead, they need to work for the parties so they get the results they want to accomplish. Yet this is not what guides most of today's contract design.'
Legally 'perfect' contracts that seek to allocate all risk to the other party, Helena observes, 'may not work as intended'. Difficulties in reading, understanding and implementing such contracts can lead to a host of business and legal problems.
This, Helena concludes, means that contract drafters must focus on the usability of both consumer contracts and commercial contracts - viewing them not just as legal tools but also as business tools. The paper goes on to highlight new methods to improve the clarity and usability of contracts, and proposes information design and visualisation - adding tables, charts, and images to supplement text - as promising new ways that can help in this venture.
Read more (in German only) at http://www.ots.at/presseaussendung/OTS_20120306_OTS0068/lexisnexis-best-paper-award-praemiert-beste-arbeit-der-iris-2012-bild or contact Helena at www.lexpert.com
Learn more about Helena's work with the IACCM Proactive Law Group at www.iaccm.com/gp/proactive
Contract Management Is Complex: A Case Study
One choice international shippers face is whether to sign long-term contracts with ocean carriers or use freight forwarders and pay spot market rates. In the current environment, spot market rates are often lower, but shippers may face a service penalty when capacity tightens. Just as airlines overbook, so do ocean carriers. However, while airlines reward those who give up their spot, ocean carriers don't. In an overbooking situation, ocean carriers are likely to reward shippers that have long term contracts with better service.
Shippers that decide to move a portion of their freight using long-term agreements will quickly learn that ocean contracts are complex. There are dozens of ocean carriers that cover different lanes, plus a multitude of different surcharges, including charges based on commodity type, and minimum quantity commitments.
Matt Motsick, the CEO at Catapult International, and Alicia Canelos, Director of Managed Services for Ocean Rates, talked to me about the complexity surrounding surcharges. Catapult has IT solutions and special expertise in ocean freight audit.
Matt and Alicia told me that ocean contracts are notoriously complex, with each carrier contract being very different in format and content. On the content side, each carrier has different surcharges and applies them in different ways. There are 367 different surcharges worldwide according to Catapult, and a large percentage of them are port charges. There are many different types of port charges, and every port charges a different amount for their services. For example, some ports have theft and recovery charges. Also, the vocabulary surrounding surcharges is not standard - what shippers are used to calling "fuel surcharges" for over-the-road transportation, ocean carriers call a "bunker contribution charge" or a "bunker adjustment factor." Further, the surcharges are listed in different places in the contract. If you're a cynic, you might say a carrier's goal is to confuse customers.
There is a modicum of good news. The Federal Maritime Commission requires ocean carriers serving the US to publish all tariffs and surcharges. In theory, these are publicly available online. However, to find the web page, discover the surcharges, and apply them to the contract is a time-consuming task at best.
Shippers frequently seek to negotiate long-term contracts with fixed surcharges so they don't have to constantly adjust rates in their transportation management system (TMS). Often the goal is to include as much as possible in the fixed rates, sometimes including fuel surcharges. But buyer beware! For a carrier to sign this, they have to charge a premium to cover their risk. The more surcharges included, and the more those different surcharges are apt to change in price, the higher the risk premium will be.
There is also complexity around commodity pricing. I talked to Ivan Latanision, Senior Vice President of Product Management at INTTRA about this aspect of ocean contacting. INTTRA offers a multi-carrier e-commerce platform that facilitates the communication between ocean carriers, freight forwarders, and shippers. Ivan told me there are historical reasons for commodity pricing. Before ocean containers were introduced, port workers had to break down bulk loads. The difficulty in performing this task varied by commodity type, so it was reasonable for longshoremen to be paid differently based on what was unloaded. But while the task of breaking bulk has largely disappeared, these commodity-specific royalties remain.
According to Kim Le, the Director of CargoSmart North America, the commodity naming conventions are not standard. One carrier might call a commodity in question a "car," a different carrier might call it an "automobile," and a third carrier might call it a "vehicle." This can make apple-to-apple comparisons difficult.
But Kim also says the lack of standardized naming can work to a shipper's advantage. It might be that a commodity could be fairly labeled in one of two ways. Naming conventions are not always black and white. This is particularly true in certain commodity classes like furniture. In this case, the shipper can choose the commodity with a lower fee associated with it. Carriers, because of their excess capacity, are more willing to be flexible. Shippers who have visibility to the rates of associated similar commodities in their contracts have greater flexibility to book cargo against the lowest rates available.
Kim's company, CargoSmart, offers an e-commerce platform focused on ocean transportation. CargoSmart provides solutions for shippers and logistics service providers to manage their ocean carrier contracts online. The solutions automate the complex process of preparing for negotiations, making optimized bookings against contracted rates and routes, and reviewing carrier performance throughout the year.
Finally, there is the issue of minimum quantity commitments. If a shipper commits to move a certain quantity of goods on a lane with a particular carrier, they need to track that and meet their obligations. If they don't, they face penalties. If a shipper has committed to different volumes for different carriers on a lane, the tracking of these "allocations" becomes more difficult. A good transportation management system automates this allocation tracking process.
Ocean contract management is complex. But by using a robust TMS, domain experts, and other ocean-specific solutions, shippers can make more optimal decisions.
Global Sourcing; More Control In Your Import Supply Chain: Still Buying CIF?
Importing involves a more distant supplier with extended transit lead times. As lead times are one the critical components when deciding how much to order from suppliers, then knowledge and control of this lead time is necessary. Indeed, fixed reliable lead times are a “mandatory” component for effective inventory management.
However, what often happens is that many UK buyers decide to import on CIF or C&F Incoterms and therefore, they leave the organisation of the transit with the supplier. Effectively therefore, the associated supplier lead time is also externalised. Importing companies will then often spend and waste time expediting and checking where the goods are, when they will arrive etc.
Delays in transit times can also cause potential product shortages, impact on customer service levels and to not satisfying customer requirements. With regular repeat orders, then any delayed transit times will also inevitably lead to increased stock levels, as the buying company will then be holding additional stock as a protection against the uncertainty of the suppliers lead time.
Benefits of changing to EXW/FOB terms
It is however possible to better control imports by switching to Ex Works (EXW) or Free on Board (FOB) Incoterms and the following benefits will then be realised:
• Control and knowledge of exactly what is happening; (management needs to recall here that the management cycle not only involves planning, organising, directing but also controlling).
• Visibility and knowledge of exactly where the products are during the transit; as simply, the transit it is now in your direct control.
• Cheaper freight costs as you are now directly paying them. Importers and buyers need to appreciate that suppliers have a margin on the freight costs they have paid; after all, they are not over time, going to be losing money.
How to change
A useful place to start is to understand some of the aspects of total supply chain management, for example:
• What are your costs of holding inventory?
• What supply lead time is required?
• What part of the supply lead time, is the transit lead time?
• What would be the effects of reliable and consistent on time in full receipts for your business?
How does the above compare to your current situation?
Answers to these questions are always revealing and also often show, how the internal structure is fragmented and unorganised to undertake effective importing.
Answers will also provide the basis for accessing the benefits of changing.
The next steps
Ask for the suppliers EXW price.
• Negotiate freight terms, possibly by going out to tender for a global or regional freight forwarder.
• Check on the track/trace system to be used. This can be a simple key point reporting with spreadsheet recording, or, an instant on demand access to a carriers system.
• Assess the risk of changing, for example, any extra management costs, the insurance costs and the risks of direct exposure to regular variations in freight rates.
• Compare and contrast the current CIF price against the new EXW price plus the freight, insurance and risk costs. It is important to ensure a like for like comparison with the current methods as many of the current costs may well be hidden.
• If deciding to change, and effectively changing the procurement and buying strategy, then ensure that the internal structure will support the changes.
What others have done
There is much evidence to support that the changes detailed above are worthwhile as shown by the following three case studies.
1) A major food retailer had spending of £1200 million on imports via third party wholesalers and £500 million on direct imports. For example, home and leisure products were ordered through UK agents who arranged everything to DDP. Meanwhile, beers, wines and spirits were bought EXW works or FOB with freight arranged through various forwarders. A change in management identified that they had:
• no systems
• no cost visibility
• no economy of scale
• poor product availability
• an internal fragmented structure; for example, Trading on product selection, negotiations, selection of suppliers, and ordering; Finance on letters of credit, payments; Logistics on order quantity and phasing into supply chain
The company tendered and then outsourced to one forwarder but maintained and determined carrier selection when appropriate. The reported results were:
• Freight costs fell by 8 per cent
• Duty charges reduced by 10 per cent
• Fuller visibility of supply chain
• Reduced stock levels
• Centralised the previous fragmented internal control as a new structure followed the new strategy
2) A major clothes retailer with nearly 200 stores had 70% of products imported, mainly from Far East. They identified that they had the following problems:
• No accurate data therefore no visibility
• Orders arrive “unexpectedly”
• 40% time spent of phoning/checking
• Paid high demurrage/rent port costs
• Restricted on buying currency forward
• Poor QC
The solution was to:
• Change from C&F to FOB and use one UK forwarder
• Set up a simple database tracking on transfer points. PO, confirmed, tariff heading, cargo booked, authorise shipment, confirm shipment, documents banked, documents received, arrival time, clearance time, arrival at DC., QC checked, released/available.
• Integrated all their internal systems
The benefits reported were:
• Lower demurrage costs
• Improved warehouse efficiency due to scheduled arrival’s
• Improved finance due to forward currency buying
• Quicker customs clearances
• Better product availability
3) A supplier of branded and own label cleaning products to major retailers
Cost-cutting initiatives had become a way of life in the face of major supply chain challenges. The company’s supply chain manager noted that: “In the past four or five years we have had to work hard at controlling our costs at a time when there have been no price increases from our customers”.
The operation therefore changed to buying products ex-works. The challenge of bringing in consignments cost-effectively is made more difficult by the low-value nature of the products, many of which are very light and use up large quantities of space. The companies’ continued success is seen as directly related to its freight cost management and arrangements.
Stuart Emmett is a freelance independent trainer and consultant who trades under the name of Learn and Change – Stuart believes that in times of change, it is only those who consciously learn, that will inherit, a successful future.
Stuart has operational and strategic experience in varied commercial service industries - gained in the UK and Nigeria – and is particularly interested in the “people issues” of management processes, as well as logistics and supply-chain management. He has worked on 6 continents, in over 30 countries and delivered to over 50 nationalities.
Stuart has written many books on supply chain topics, for example "The Supply Chain in 90 minutes” published by Management Books 2000 "Excellence in Warehouse Management" published by Wiley
"How to Mentor and Support Learning" published by Capita
"Logistics Freight Transport: Domestic and International" published by Cambridge Academic Press
“Excellence in Supply Chain Management” published by Cambridge Academic Press
"The Leadership Gospels" published by Cambridge Academic Press
“Excellence in Freight Transport” published by Cambridge Academic Press
“The Business Toolkits” (individual titles on Learning, Personal Development, Motivation, Team Building, Customer Service, Communication, Systems Thinking) published by Management Books 2000
“Excellence in Leadership and Management” published by Cambridge Academic Press,
Joint Author of:
"Stores & Distribution Management" published by Cambridge Academic Press
"The Relationship Driven Supply Chain; creating a culture of collaboration throughout the chain" published by Gower
“Excellence in Inventory Management” published by Cambridge Academic Press
“Excellence in Procurement” published by Cambridge Academic Press
"Excellence in Supplier Management" published by Cambridge Academic Press
“Excellence in Services Procurement” published by Cambridge Academic Press
“Green Supply Chains; An Action Manifesto” published by Wiley and was selected as the “Most Innovative Supply Chain Book of the Decade” in 2011 by Supply Chain Insight Vietnam
"Excellence in Global Supply Chain Management" published by Cambridge Academic Press
“Excellence in Maintenance Management" published by Cambridge Academic Press
"Excellence in Public Sector Procurement" published by Cambridge Academic Press
Stuart can be contacted at firstname.lastname@example.org or by visiting www.learnandchange.com
Supplier Relationship Management: Program Launch
Be one of the first to achieve the world's only internationally recognised and accredited qualification in supplier relationship management (SRM).
The pioneering program is designed to equip practitioners with the skills and knowledge they need to implement SRM practices effectively within their organisations. Completion of the program will lead to individual certification and a “licence to practise SRM”.
SRM is emerging as both an important business activity and a professional discipline within major organisations around the world. Research evidence suggests that SRM can deliver significant tangible benefits in addition to those achieved through world-class strategic sourcing, negotiation, and contract and performance management.
You will join a group of practitioners as they work through the learning program, in a virtual environment of e-learning modules enhanced by message board interactions across the group and webcasts to enhance the learning materials and provide a forum for interactive discussion of best practices. The skills assessment tool will enable you to do a gap analysis on your current level of skill and capability, enabling focus on personal learning goals for greatest development impact.
This comprehensive training program recognises that relationship management requires a blend of technical capabilities – for example, in process and organisational design, and structuring of appropriate contracts and future-facing measurement systems – and key behavioural competencies such as communication, influencing and trust building.
Participants on this e-learning programme, will learn how to:
- Prepare convincing SRM business cases
- Design an effective governance structure
- Create and implement a communications plan
- Engage key stakeholders and supplier executives
- Develop metrics that drive successful behaviours
- Encourage positive approaches to change
- Collaborate with strategic partners
- Devise appropriate contractual arrangements
- Track and report SRM benefits
- Resolve conflicts and issues collaboratively
The SRM Program has the following priced elements, all prices are quoted in US dollars:
Skills Assessment: $150 per person
e-learning program: $750 per person
(note that skills assessment is a requirement of certification)
Practitioner - Member Level (intermediate): $150 per person
Expert – Certified Member Level (advanced): $250 person
IACCM membership is an additional $150 per annum per person
Please note that we are able to run the SRM program as an in-house corporate program for your company, with a minimum of 6 participants.
The corporate program is facilitated by means of a bespoke learning portal created for your company. An additional $1500 set up charge applies.
The above per person charges may vary for a corporate program, to enable us to meet your needs for webcast interactions, on site interventions, message board participation. Further details of corporate programs are available on request: email@example.com
Contracts & Social Networking
There are some obvious questions related to the use of social network sites by contracts and commercial professionals, but these are essentially no different from those which affect other staff groups. They are the inevitable concerns over the use of networking sites such as LinkedIn or Facebook for posting discussion items and the threat to confidentiality these might entail; or the effectiveness of such sites for recruitment; or their informal use for inter-company communications on contract issues. Some organizations have sought to manage risk by turning to more secure managed networks, such as that operated by professional associations like IACCM, as a way to gain ideas and suggestions, or to test new approaches, or to support employee learning programs.
Recent research points to the importance that younger workers now place on social networking access – not only for their ability to maintain personal contacts, but also to build their professional network.
But when it comes to contracting specifically, we may have potential to learn rather more from the experiences of social networks. For example, there was recently an article about the way that on-line dating sites may steadily transform partner selection. The introduction of evaluation criteria allows the creation of short-lists for potential partners, spreading far beyond the traditional limits of geographic boundaries. Monitoring the success of these relationships is starting to generate more accurate predictions of the criteria for successful matching.
It doesn’t take much imagination to see how these same principles may steadily be used to assist in supplier / customer selection. Finding the right type of partner, who not only offers the right sort of product or service but also shares similar or complementary ethical principles, cultural perspectives, appetite for risk or record for innovation, could certainly be enhanced through computer matching.
And another outstanding thought that came from IACCM’s recent interviews on ‘The Future of Contracting’ concerned the sort of techniques already being used by networking sites like Facebook. That is, based on historical preferences and behaviors, starting to predict what will appeal to the other side and clothing a product or service with the commercial terms that match their specific preferences.
These are just a couple of ideas of ways that social networking experiences may start to cross over into the world of contracting. Do you have others? Please share your ideas or experiences (good or bad) by writing to www.iaccm.com