At the local purchasing association meeting on Tuesday, I had a fascinating conversation with a colleague who was struggling with a supplier situation.
You see, she had a contract in place with a supplier and that contract included a well-thought-out price adjustment provision. However, the supplier had recently been acquired by a bigger player in the industry. The “new” supplier said that the contract was null and void since the “original” supplier no longer existed. Furthermore, the supplier said that it was increasing its prices by 20% even though a month earlier the price just went up by 7% in accordance with the price adjustment provision.
Excuse me for a second while I find my blood pressure medication…
…OK, thanks, I’m back.
Of course, my colleague asked me “What should I do?” and she explained how she pleaded with the supplier to no avail. Here’s a summary of what I told her.
1. Never, EVER act subservient to a supplier. In this case, I wouldn’t be begging the supplier not to do what they threatened to do. I would simply say “That’s not happening.” By begging the supplier not to follow through, you are essentially giving them power. You are implicitly acknowledging that the decision is theirs to make and that they can elect to “show mercy” or not. In these types of situations, I’ve said things like “It’s such a coincidence that you brought up the price issue. We’ve recently decided here that the price needs to go down, plus we need to stretch our payment terms from 30 days to 45 days, and we need you to reduce your lead time from 8 weeks to 6 weeks. We were thinking that these changes would go into effect October 1 but may be able to hold off until November 1. By which date would you be prepared to implement these changes – October 1 or November 1?” Now, of course, we didn’t implement these changes. But the price didn’t go up either and the supplier knew “who was boss.”
2. Most well-written contracts have an “assignment” provision saying that, when a successor acquires the supplier, the successor also acquires its contractual obligations. In fact, acquisition of contractual obligations is law in probably most of the world. If the contract had an assignment provision, this should be shown to the supplier as ammunition.
3. Most well-written contracts have a “dispute resolution” provision where the parties agree to arbitration or mediation in the event of a dispute. This is the time where I would be insisting that we arbitrate/mediate immediately.
4. Not honoring a contractual obligation is a serious matter. You can never have the type of modern, collaborative supplier relationships necessary if your suppliers do not honor their obligations. So, I would source soon. If this is not a high spend category, I may not drop my other priorities to source this week or this month, but it would be on my near-term radar. Even if the incumbent ended up being the lowest priced or highest ranking bidder, I would think twice about awarding the business to them. If their contractual price structure can’t be relied upon, it’s time to look at the other fish in the sea. A supplier’s proposal can only save you money if they actually honor the price and the price adjustment scheme that they agreed upon.
NOTE: If you aren’t familiar with price adjustment, assignment, and dispute resolution provisions, the online class “Supply Management Contract Writing” can help you learn how to apply them to your work.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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