In the lead-up to Valentine’s Day, let’s explore the heartbreak involved in being let down by a supplier.
Supply chains can be fragile entities. Particularly in an era of Just-in-Time (JIT) supply management where businesses keep costs down by minimizing inventory, a supply chain only works so long as every link functions smoothly. But things do go wrong – a supplier’s machinery may break down, human errors are frequently made, or your suppliers’ suppliers may let them down in turn.
Sometimes your business may be able to absorb the fallout from not receiving crucial goods or services from a supplier. For example, you may have some inventory in stock, or it may mean you simply have to delay the implementation of a project. But in many cases, your business can suffer significant financial and reputational impact as production grinds to a halt or customers look elsewhere when your product goes out of stock.
Here are six tips on what to do (and what not to do) when a supplier lets you down.
1. Activate your back-up plan
Risk management 101 in procurement involves having a network of back-up suppliers for when disruption occurs. Having a plan in place is vital, as you don’t want to waste valuable time on supplier discovery when your organization needs a replacement product or service delivered as soon as possible. Try to ascertain how long your principal supplier will be offline and arrange a backup source of supply to cover that period.
2. Avoid a knee-jerk reaction
Strategic procurement involves focusing on the long game. Even though the problems caused by a supplier letting you down can seem all-consuming and extremely frustrating at the time, make sure you don’t make a hasty decision like canceling the contract or firing off an angry email that will damage or end the relationship. Look instead for ways to resolve the situation (which is hopefully a one-off occurrence) in a professional and measured manner.
3. Check the contract
Assuming you have a service level agreement with the supplier, it’s likely it includes a clause laying out the actions that should be taken when goods or services are not delivered. Check this first before beginning discussions with the supplier about penalties or compensation – and you can be sure that the supplier will be checking the contract at their end. Ask a legal professional for help if you’re not sure you understand the contract terms.
4. Seek compensation
When a business has suffered loss as a result of a supplier failing to deliver, that business is under a duty to mitigate its losses. The steps involved are:
- Ensuring the supplier admits fault for the disruption
- Checking the contract and analyzing how much the fault has cost your business
- Requesting the supplier credit your business the appropriate amount
Assuming this is a one-off event, most suppliers will agree to pay compensation because they know there is more value in preserving the relationship and keeping your business.
Be sure to keep thorough records of all communications with the suppliers about the disruption, and escalate the complaint to the supplier’s sales director if appropriate.
5. Change suppliers if necessary
If a supplier is a repeat offender and there’s a high risk they will let you down again, procurement has little option but to terminate the relationship. This can be done by:
- First determining that the situation cannot be otherwise resolved
- Making the case internally for terminating the relationship
- Arranging an alternative supplier(s) before terminating the relationship
- Checking the contract for a termination clause
- Calling the supplier to explain the facts, and putting the conversation in writing via email
- Being compassionate and professional
6. Don’t burn your bridges
If you’ve communicated well up to this point, the termination should not come as a shock to the supplier. Keep in mind that losing your business could be a huge setback for the supplier, and do your best not to burn any bridges; you never know when your organization may need to interact with that supplier once again in the future. For example, you may give the contract to a competing supplier but will need to retain the original supplier as a back-up in case of disruption.
Hopefully, you have a Valentine’s Day free of supply-chain disruptions or other heartbreaks. But if you do, following the steps above will minimize the damage involved.
Get in touch with Una to discuss how being part of a group purchasing organization can help minimize the risk of supply chain disruption.