Considerations for Customers of Supply Chain Services in Light of Recent IssuesPrint publication
Walker Morris’ Commercial Contract specialist James Crayton offer some practical tips following recent media focus on supply chain issues, including those experienced by KFC and Wetherspoons.
In November 2017 Yum Brands owned KFC awarded DHL and QSL its contract to manage its British supply chain, ending its relationship with delivery company Bidvest. Less than a week after the new contract went live in February 2018, hundreds of KFC branches were forced to close due to a number of deliveries being incomplete or delayed.
JD Wetherspoon removed steak from its Tuesday steak club menu in January 2018 following reported food compliance issues with its meat supplier, Russell Hume. Wetherspoons subsequently cancelled its contract with this supplier and the supplier entered administration.
These real world examples prompted us to pull together some key considerations for customers to keep in mind when negotiating supply chain contracts.
Awarding a supplier exclusivity will undoubtedly put you in a strong position to negotiate lower costs, however you should take care when putting all your eggs in one basket. Ensure your supply contract contains provisions to allow you to source from third parties in the event that your supplier has issues. This might mean short term costs, however some contracts allow these to be recovered from the failing supplier. You may also wish to consider including a provision allowing you to terminate the agreement in the event that supply is disrupted for a specified period.
Choosing measurable service levels and documenting what the measure of success/ failure looks like in an SLA is only effective if it is properly incorporated into your agreement. Moreover, your agreement should deal with what happens when such service levels are not met. A service credit regime may seem like an appropriate remedy but consider if it is enough of a “stick” to guarantee proper performance. It may be that other obligations such as escalation or a performance improvement plan are a more practical way to manage your supplier. Such terms may provide you with an adequate remedy in the event of certain service level failures, however in the event of persistent breaches of the same service level or breaches of certain ‘critical’ service levels, you may also wish to include a loss of exclusivity, or a specific right to terminate.
Exit Management and Implementation Planning
The start of any supply relationship is the best time to think about what is going to happen on exit. Once the contract is signed, commercial pressure on the supplier to agree to help on exit (when they may inevitably lose interest in the relationship) is likely to dissipate, and the momentum needed to agree a post-signing exit plan is often lost. A detailed exit management plan containing transitional service provisions could be key to ensuring you have the support required from the exiting supplier for smooth transition to a new provider. A robust exit clause will set out the support you require in the agreement itself (as opposed to obligations to agree an exit management process at a later date prior to exit). Consider provisions which document the scope, length and cost of transitional services and also inserting obligations on your exiting supplier to assign or novate any sub-contracts or licences in place with third parties to the new supplier.
For further information or assistance with drafting supply contracts or managing your supply chain, please do not hesitate to contact James, Charlotte or any member of Walker Morris’ Commercial Contracts team.