Supplier Contracts: To End Or Extend?
Are Your Supplier Contracts No Longer Serving You Well?
PurchTips Edition #330 Click here for the printer-friendly version
Strategic sourcing is a lot of work. So, it can feel convenient to simply extend a contract with a supplier rather than go through a strategic sourcing process. But it’s not necessarily smart.
The decision to extend a supplier contract should be made because you are confident that the supplier is still the best fit for your organization. You can only truly have this confidence after assessing three aspects of your supplier situation: the supplier’s performance, your current requirements, and the market.
Here are some questions you can ask to assess each of these aspects. When pondering them, you should be comparing your current situation with the situation you were in when you first selected the supplier. You may confirm that the supplier is still a great fit for your organization. Or you may find that the supplier relationship has become quite outdated!
Supplier Performance: Is the supplier’s defect rate rising? Is the supplier’s lead time rising? Is the supplier’s service becoming less satisfactory? Is the supplier having difficulty adapting to changes that you drive?
Your Requirements: Have your specifications changed? Has your organization adopted more values-based initiatives, like corporate social responsibility? Are your quantities increasing?
The Market: Have new competitors entered the market? Have more mature competitors differentiated their products or services? Have market prices decreased as reported on indices like the Producer Price Index?
The more of these questions you answer with a “yes” response, the more optimal it will be to engage in strategic sourcing rather than simply extend a contract with an existing supplier.
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Copyright 2015. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.
By Charles Dominick, SPSM, SPSM2, SPSM3
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