22 July 2010 | Adviser Q&A

We have dealt with suppliers on an informal basis for more than six years. I have recommended to the company we sign formal deals with them. How can I do this without harming our relationship?

Purchasing manager, Cheshire

PAUL BAIGENT
European purchasing director, Aliaxis

It’s important to get a more formal arrangement in place with your suppliers to protect your position in the market. To rely on an informal agreement, although arguably fine legally, is fraught with hazards in practical terms. People move jobs, situations change and commercial pressures often push the informal relationship to the limit. You need a set of rules to navigate your way out of a difficult situation – to rely on what has been said or practised leaves lots of room for disagreements and disputes.

Suggest to the supplier you need to formalise the relationship to protect it. You have no problems with the way you work together but it is in both parties’ interests to formalise this in a written contract where all eventualities are addressed. Emphasise this is a sign of the strength of the relationship and not a threat to it.

Use what has been developed informally over the six years as the basis of your new arrangement. If you ignore the hard work done to date and start again with a one-sided draft it may well upset the supplier.

TOM CASEY
Manager, Outsourcing Centre of Excellence, Everything Everywhere

Formal deals usually imply there is some financial or operational risk to the company and therefore it is good practice to manage this through a contract or agreement.

The deal could actually assist the relationship: it will define what the service is, agree the service level agreements and put good governance in place to protect the supplier relationship.

I have had to put similar formal agreements in place with internal stakeholders to manage their expectations on how quickly procurement can respond to their queries. Previously we were getting criticised for slow response, even when there was no definition on turnaround time. By having basic agreements in place it helps to manage people’s expectations and tells them how well or badly the supply chain is performing.

JAMIE NAPPER
Global SRM excellence manager, RSA

A more palatable way of looking at this would be to ask how it could damage your business if you don’t do it. Supplier relationships are important, but they need to be based on a firm understanding of what responsibilities lie where.

The protection to both sides that formal deals can bring through agreed pricing, payment, performance and engagement and disengagement processes should outweigh the risks of upsetting a supplier.

You could say the true test of the relationship you have will come from the response you receive when you start the process. I’d want suppliers that welcomed the formalisation of the supply, otherwise you should ask whether they are the right supplier in the first place.

The process does not have to be seen as restrictive. I have seen some great contracts recently with very flexible terms, risk and reward arrangements and innovation incentives. Explain the reasoning behind the decision and the right suppliers will see this as an opportunity to work together formally. These are the vendors to build ongoing relationships with.

Key points

• Sell the idea to the supplier as a sign of the strength of your relationship

• A good formal agreement will protect both parties

• If your vendors do object, it’s worth asking what they have to hide

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