As both procurement experts and suppliers understand, sourcing a product is more involved than simple physical acquisition. Considering the plethora of product recalls that seem to be constantly in the news, it’s clear that making sure products meet certain standards can be challenging if the right supplier non-compliance monitoring systems aren’t put in place.
Let’s face it, defects are not always physical or tangible: more and more, especially as markets become increasingly globalized, companies are building labor standards, fair trade requirements, and environmental policies into their supplier contracts. This makes it all the more important for both parties to have effective ways of supervising what’s in their contracts to spot potential problems.
The cost of supplier non-compliance.
A recent Supply Management article demonstrates how suppliers can be damaged by neglecting contract terms. Undertaking an audit of their suppliers last year, Apple uncovered underage labor, environmental concerns, and false documentation at some facilities. They terminated their relationships with 18 suppliers, putting numerous others on probation for “core violations” of their supplier responsibility terms. Beyond defining product standards and quantities in its contracts, Apple built human rights policies into its supplier agreements. This kind of “contractual ethics” is becoming much more common, and every company has the opportunity to make ethical concerns part of their brand to satisfy end buyers increasingly concerned with transparency. Often, however, these ethical clauses are not just nice to have – they’re legally mandated. For instance, a construction company ended up paying $12 million last year for misrepresenting how many women and minority subcontractors they used for an Illinois public works project. Especially when contracts involve government parties, the risks involved in non-compliance are high.
The role contracts play.
Clearly, the impact of contracts for both buyers and suppliers goes far beyond meeting deadlines and price concerns – contracts can make or break an enterprise based on the public message they send out and the legalities they contain. Apple was smart to audit their suppliers before a third party discovered the violations and subjected the company to outside scrutiny and possible legal action.
With all of the intricacies and increasing regulations surrounding supplier contracts, your best bet is to utilize the right tools. Since every supplier relationship starts with a contract, using your contract lifecycle management (CLM) system effectively is a must. With this software, you can proactively identify risks and compliance issues within your existing contracts, and create new ones with templates and required elements so that no aspect of the supplier relationship is overlooked.
In addition to the smart development of contractual language, companies need the ability to evaluate suppliers on an ongoing basis to ensure compliance. Using an organized system for supplier information management can streamline this process and head off conflict.
To learn more about how Selectica’s innovative processes, strategies and technologies can help you effectively manage your supplier relationships, contact us.