Show Me The Money! Get What You Deserve – Contract or Not

Supplier Remuneration – Sometimes You Just Have to Ask: Recouping Losses Due to Supplier Error Without Strong Contractual Protection

Warranty Handshake

This is a true story about a supplier issue that led to a massive field return issue – but actually improved the relationship. “Why is this an issue?” you might ask. Well, not all supplier relationships are governed by strong, broad-based agreements. Sometimes, without appropriate coverage or protection, especially in a sole-sourced situation, you just have to ask for a remedy and hope for the best.

How did we get to this point? 

The relationship between the supplier and us was solid. The companies worked together long before I arrived. For the most part, things were going well. However, the contract was not up to date and we were not properly protected from mishaps of the supplier.

We bought a specialized system from them to run part of our software. We installed these systems worldwide for our customers as a critical element of our overall solution. As with any purchasing environment, we tracked cost, quality, delivery, technology capability, and response to issues to judge performance. They performed very well.

Then, we discovered the issue.

 

The impact

It was not the type of problem that surfaced during the normal testing and evaluation. In fact, it was serendipitous that we found the issue at all. Once we discovered it, there was no turning back. Due to the nature of the problem, it was inevitable that at some point our customers would experience an unacceptable problem.

The cause of the problem was not the usual bad device or faulty manufacturing process or the rest of the list of hardware hiccups. The supplier had made a change in their manufacturing control system (MRP). During the translation from the old to the new system, the bill-of-material (BOM) got truncated and a number of components in the design never made it into the hardware. Despite that, all of the functional tests passed their processes and ours.

By the time we realized it, we were hundreds of systems, and a few million dollars, into shipments and field installations. Houston, we’ve got a problem.

We had to recall, replace, and repair the systems immediately – it was an “epidemic” situation. The challenge was that replacement had to occur first. We worked through those logistics to ship, replace, return, repair, and then re-ship. Fortunately, the systems were all very new and we could send repaired systems back out as new.

Please

We began the dance to get the supplier to cover the recall and replacement costs. Back and forth between the procurement manager and the account executive at the supplier.

Of course, our CFO was breathing down my neck. “We never get compensated for anything from suppliers. How come we always bear the burden?” Mind you, the contractual situation was inherited.

Regardless, time to negotiate more intensely. I went back and forth with the account executive.

“Look, we did not cause this. In fact, we did nothing wrong. You shipped us bad stuff.”

“Yes, I know. But why should we pay for the overall recovery? We are not obligated. There’s no way our financial executives will allow me to commit anything. We will fix our mistake, but that is it.”

Time to escalate.

Money Handoff

In the end we got our compensation

The escalation call was scheduled. The account exec told me not to expect a miracle or anything different from the financial executive.

The Cliffs Notes version went as follows.

“We have a major recall and repair problem. We are thankful that you are fixing the problems quickly and expediting new material to accelerate the entire process. However, we are spending a couple hundred thousand dollars to execute the entire process. Our customers cannot wait, so we must move fast. The personnel and shipment costs are not cheap.

“Please accommodate us by paying at least half. Thank you.”

Within 15 minutes of the call, the account executive called me back.

“You won’t believe this! Your request was so compelling, honest, and candid that the financial person agreed to compensate you. Congratulations. I never thought this was possible.”

It was even more fun walking down the hall to tell our CFO that we got half of the money back. He was equally ecstatic.

The negotiations and escalation could have gotten heated and hurt the relationship. We could have threatened legal action or changing suppliers. Both of these courses would incur a lot of opportunity cost and wasted effort.

Instead, we just asked and they said “yes.”

ciao…mam

  

Michael A Massetti is a supply chain executive who has managed procurement, quality, supply chain planning, operations engineering, and more. He’s also “gotten the money” when suppliers go awry.

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Don’t Be Afraid to Say “No!” to a Bad Contract

The Grass is NOT Always Greener on the Other Side of the Fence!

Grass-isnt-always-greener

With the new operations and procurement organization in place, it was time to focus on improving the performance of the supply chain. Since we were a relatively small manufacturer, we maintained our contract manufacturing with one partner. The performance of this segment of the supply chain was not meeting expectations. At the surface, the answer appeared straight-forward – change suppliers. The new CEO and new Sr. VP of Operations were experienced with a larger partner from their past. For the procurement team, it was time to evaluate the options – supplier improvement and/or a new supplier.

We began the new supplier evaluation process. Candidate companies were researched, visits to their facilities were completed, and we reviewed initial RFI (Request for Information) responses to prepare for the next step. We selected two companies to execute a formal bid with in addition to our current partner. With the courting process now in full motion, a few months later we made the choice to select a new supplier and begin the negotiations dance. So far, all of the amazing attributes and features of their business models were in full bloom, just like the male peacock’s glorious tail.

Dancers

Meanwhile, there was business to run, market share to attack, and profit to be achieved. Procurement was under-staffed, especially the resources dedicated to the largest and most critical supplier. After adding a very experienced out-sourced manufacturing ace to the team, it was time to drive measurable performance improvements. The four areas requiring focus were cost, inventory visibility, cost of poor quality (CoPQ), and delivery performance. The team set out to establish systematic improvement plans in each area – that’s what procurement does. With all of the warts and blemishes in full purview, we had to assess if we could dress our current dance partner up to the hilt.

With the prospective partner identified, we prepared to negotiate the contract. We had already negotiated myriad contracts during our professional life. We understood the ins and outs of negotiating, outlining critical goals for each partner, giving and taking on the hot clauses, and sending countless red-lined versions back and forth. It always seems to go this way: we tear through many of the clauses rapidly but get bogged down on the most intricate ones that have the largest financial risk.

Stalemate

Six months had passed since the contract negotiations commenced and we had not reached closure. It was looking dismal. There were a few very critical clauses that we could not even come close to agreement on – we put negotiations on hold twice during the process to ensure both companies were thinking things through thoroughly. We had come to a critical juncture in the potential relationship, not just the approval of the agreement. Despite many attempts to massage the wording to accommodate both parties’ concerns, we had reached a stalemate.

It was a difficult call to make, but it was time to go to the senior vice president and tell him we had to abandon the negotiations – we could not accept the financial risk that was being put on us compared to our current situation. During the six month period of the negotiations, our existing partner’s performance had transformed markedly. The quality team had reduced the cost of quality excursions by 50%. Delivery performance climbed over our 95% objective. Inventory issues had virtually disappeared. And, cost reductions were reaching all-time levels. Was there really a dire need to change suppliers anymore? In contrast to the courting phase when we observed all of the beauty of the new supplier and the warts of the existing one, we had a more complete view of both parties now.

Cancel Contract

In the end, we said “No!” and continued a successful and productive relationship with our existing partner. We sat down and hammered out a new agreement with them in less than two months. Business was progressing well. While it was a difficult decision to make, in the end, it was clear that the grass was not greener on the other side of the contract fence.

ciao…mam

Michael Massetti is a high-tech supply chain executive who really does enjoy being a supply chain professional! Seriously.

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