Best Practices in Supply Management Journal

62nd Edition, September 2013

Articles In This Issue
Terminating for Convenience - A Key Legal Concept to Understand"
"So You Think You're Strategic?"

Free Cost Saving Offers, Founder Articles & Appearances, and Job Opportunities.

 

Free Cost Saving Offers

If you'll contact Strategic Procurement Solution, readers companies may receive FREE cost reduction assessments related to their parcel freight and/or telecommunications expenditures.   These take just a few weeks, without any obligation for additional services. 

Upcoming Founder Articles & Appearances:

An article by Mark Trowbridge  titled "How to Find, Maintain, and Motivate Top Talent" appeared in Supply Chain Management Review Journal (May/June Edition).  Our readers can view the article at SCMR Article Link

Mark Trowbridge will partner with ISM Northern California to present a one day version of our Strategic Contracting workshop in San Francisco on October 4th.  Please Click Here for Conference Information

Mark Trowbridge will also be a keynote address (Harvesting Supply Chain Talent) and two day master class (Expert Strategic Sourcing) presenter at the MENA Strategic Procurement Conference in Dubai, UAE November 24th - 27th.  Readers can learn about this 500 person annual conference at Click for Conference Information

Our company's founders often partner with ISM, NCMA, APICS, and NIGP affiliates to present day seminars and dinner event keynote addresses.  More than 100 presentations have been made to local affiliates during our history.  Please Click Here to arrange a presentation for your chapter's 2013/2014 fiscal year.  Note - We now offer CPSM/CSM exam preparation training workshops.

Job Opportunities:  We are currently helping clients fill the following SCM career opportunities.  Contact Strategic Procurement Solutions through our website if interested...

-  Director of Corporate Procurement, Financial Services Firm, Western State.  Experience transforming procurement operations for a 4,000 employee company into a center-led model. Expertise with indirect spend sourcing (Marketing, Technology, HR, Facilities...). Base Salary Between $130K and $150K USD, Excellent Bonus and Benefits Package.  Relocation Negotiable.

- Sourcing Leader, Greater Sacramento Area, California, Financial Services Company.  Base Salary between $75K and $110K USD.  Excellent Bonus and Benefits Package.  Relocation Negotiable. 

- Sourcing Consultant (6 - 12 month project), Greater Sacramento Area, California, Financial Services Company.  Annualized contract compensation between $95K and $115K USD.  Must be locally-based.

Strategic Sourcing Specialist (Professional Services & HR Benefits), Holland Michigan Area.  Base Salary between $95K and $115K USD.  Excellent Bonus and Benefits Package.  Relocation Negotiable. 

- Procurement Operations Manager, Princeton, New Jersey Area.  Experience Implementing Procurement Technology Solutions Required.  Experience Managing Contracts Management Activities Also Needed.  Strong Experience Expanding P2P Impact and Operations Desired.  Base Salary Between $100K and $120K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.   

 

- HR Sourcing Leader, Southern Wisconsin Area.  Experience Sourcing and Contracting for HR Services (HMO, PPO, DMO, Benefits Administration, 401K Administration, Consulting Services, Temporary/ Contingent Labor, Training, Recruiting, etc).  Base Salary Between $95K and $105K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This electronic journal is now distributed bi-monthly to over 13,000 Supply Management Professionals around the globe. Note that our educational articles are 'in depth', unlike most online publications.  We hope you enjoy this edition. Feel free to forward to your SCM colleagues!  And keep SPS in mind when your organization needs top quality Supply Management Consulting, Employee Skills Testing & Training, P2P Efficiency Reviews, Cost Reduction Support or SCM Staff Augmentation/ Recruiting Services.

 

 

"Terminating for Convenience - A Key Legal Concept to Understand" - by Mark Trowbridge - Principal, CPSM, C.P.M., MCIPS

Any well-written procurement contract should provide each party with the ability to terminate "for cause". "Causes" which allow a party to provide notice of termination to the other might include...

 

* Breach of a material contractual term;

 

* Extended inability to perform beyond a Force Majeure event; or even

 

* Declaration of financial insolvency by one party.

 

Interestingly, termination for cause does not have to be overtly-stated in a contract (since a material breach may invalidate the actual existence of the contractual relationship), but it is always wise to have contract language clearly-articulate all ramifications of a termination event.

 

But another type of termination right can also be a strategic element in certain procurement agreements. That is the right to "Terminate for Convenience" by one or both contract parties. This type of termination allows one party to exit the agreement without the occurrence of a "cause" initiated by the other.

 

Example A - Without additional cost or penalty, either party may terminate this Agreement for convenience upon 30 days prior written notice to the other party.

 

Example B - Without additional cost or penalty, Buyer may terminate this Agreement for convenience upon 60 days prior written notice to Supplier.

 

But courts are beginning to question the unrestricted right of a party to walk away from a contractual business relationship, if the other party is unfairly damaged by that action. In fact, when the contract is silent on the matter of termination, courts have historically-sought to balance implied rights to terminate against duties to perform under the contract. The rule in many leading jurisdictions is that the contract is terminable on "reasonable notice". So what constitutes "reasonable notice"?

  

Clearly this can be a sensitive issue for a party on the receiving end of an unwelcome or unexpected termination notice.  Getting the notice period right (and communicating it to the other party effectively) requires careful forethought in order to mitigate upset, avoid a dispute, or to ensure defensibility if disputed.  The terminating party should consider the following factors when deciding what should constitute "reasonable notice":

 

* The length of the relationship between the parties (the longer the contract/relationship, the longer the notice period should be;

 

* The importance of he contract to the business of the non-terminating party (e.g. percentage turnover/core supplier);

 

* The extent of early investment by the non-terminating party (sunk costs);

 

* The terminating party's own notice requirements (if any), in related contracts under which it can be terminated for convenience;

 

* The degree of formality to the contract - the more formal the contract, the more that termination of it should be governed by the rights set out in the contract;

 

* How long it would (reasonably) take the non-terminating party to replace the contract in an orderly way (i.e. either to procure another supplier or to replace the business lost);

 

* What are the comparable notice periods in the relevant industry (i.e. what is deemed standard in the industry as a transition period or is common as a notice period in contracts of a similar kind within the industry); and

 

* Any additional considerations that may be relevant in the circumstances (for example: have new employees, technology capabilities, or business premises been set up to handle the contract volumes; are there any other factors that could impact the 'reasonableness' of the notice period?)

 

As illustrated by this list of considerations, what is a "Reasonable Notice Period" in the circumstances will always be dependent on the facts relevant to the particular contract and the parties.  In the USA for the body of law governing most commercial purchase transactions, the most-recent changes to Article 2 of the Uniform Commercial Code (UCC) now incorporates requirements for "Reasonable Notice" to apply to termination for convenience clauses...

 

"Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and agreement dispensing with notification is invalid if its operation would be unconscionable. A term specifying standards for the nature and timing of notice is enforceable only if the standards are not manifestly unreasonable".

 

Likewise, the English Courts have been reluctant to enforce notice periods of less than six (and in some cases nine) months when terminating a long-term contract for convenience. 

 

Strategic Procurement Solutions frequently trains procurement groups on best practices in supplier contracting.  We also help leading corporate and governmental groups create or improve their libraries of contract template agreements and alternative clauses to work better in a strategic sourcing environment.

 

Recently, we helped a Fortune 500 insurance company to improve their online library of template agreements.  Interestingly, I discovered that their legal group had put into several professional service agreement templates the ability for them to "terminate for convenience immediately without advance notice".  Oddly, the legal organization also had a 30 day 'notice and cure period' inserted into their "Termination for Cause" sections of the same contracts(!).  We worked with the procurement and legal groups to develop better language which provided a "reasonable" notice for different termination events. 

 

From a sourcing perspective, it is important to remember that non-reimbursed termination expenses will often be "padded" into a supplier's pricing as soon as they realize their customer wants the right to walk away from the contract on short notice.  To minimize this trend, some buying groups keep their supplier's pricing models low by putting tiered financial penalties into the contract termination clause.  The right to terminate for convenience is still there as a safety net, but security is provided to the contracting parties.

 

Don't forget that even when the parties to a contract are generally in harmony that the contract should end, the cleanest exit should be documented in writing.  The end might not have been planned at the outset but it does not need to be disastrous in its effect. 

 

Top procurement organizations use contracts as a key part of their strategic sourcing process.Specific drafting tools and techniques can enhance the effectiveness of the procurement team, both in sourcing and supplier relationship management. If you would like information about Strategic Procurement Solutions' onsite Strategic Contracting™ or Technology Contracting™ training workshops, or would like to discuss our customized Contract Template Creation/Optimization services, please email us at Info@StrategicProcurementSolutions.com

 

Note - Any legal concepts discussed in this article should be reviewed with the reader's own legal counsel before any application to your unique governing laws and authorities.

 

About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 28 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, of Bank of America (then, the USA's third most-profitable company). During his final two years with Bank of America, Mark's areas of responsibility delivered a Quarter Billion Dollars in cost reductions. During the last dozen years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topics, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM's eZine, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.  Mark's  LinkedIn profile is among the top 1% most-viewed (out of 250 Million members).

 

 

"So You Think You're Strategic?"- by Robert Dunn, MBA, C.P.M., Principal

During the last few months, Strategic Procurement Solutions has helped several client groups evaluate and optimize their procurement organizations to better-achieve 'strategic' value. These transformation projects have optimized each organization's Procure-to-Pay (P2P) process, created a Strategic Sourcing methodology for spend category management, refined the supply chain organizational structure, trained personnel in procurement "best practices", and aligned the new infrastructure to optimally match communications with customer groups and the supplier community.

 

Too many procurement organizations "think" they are strategic. But just calling a group "Strategic Sourcing" or "Strategic Procurement" doesn't really make it so. This article documents how wrong this assumption may really be.

 

Strategic Sourcing has now been around for about 20 years.  What started as a movement from several leading consultancies and spread into the corporate marketplace due to articles like that in Fortune Magazine titled "Purchasing, the CFO's Secret Weapon", is now advertised as a success by many procurement teams. 

 

But it still surprises many business executives to find how few organizations have truly "sourced" their large spend categories.  This confusion seems to exist because many supply chain professionals still hold misconceptions about what Strategic Sourcing really means.

 

This article will discuss three misconceptions about Strategic Sourcing held today:

 

Misconception #1 - Strategic Sourcing is the same as Competitive Bidding:  Not true. Many supply chain practitioners still largely equate "sourcing" with "competitive bidding".  They figure if most contracts were established according to organizational policy by following a solicitation process, then the spend category has been "sourced".  Wrong.  Wrong.  Wrong.  This misconception fails to recognize that real Strategic Sourcing requires a systematic approach to supplier consolidation, leveraging, and SCM re-engineering across entire spend categories.  Just doing "three bids and a cloud of dust" does not accomplish the goals of true sourcing.  And even though everything may have been "bid", it has not necessarily been "sourced".

 

The governmental sector is one where this is especially true.  By policy, nearly every public sector organization requires competitive solicitations to be performed for most transactions (except for true "sole" or "single" source expenditures).  But it is widely-recognized that most governmental agencies have not done a good job of consolidating and leveraging entire spend categories.  They may have bid out the expenditure, but spending, supplier selection, and product specifications remain largely fragmented between different buying groups.

 

Private sector companies also share this misconception.  They too have usually bid out some subcategories of spending, without ever doing large scale leveraging across an entire sector. 

 

Just because a procurement team is actively involved with their customer groups in doing bids and negotiations for standalone supplier acquisitions, does not at all mean Strategic Sourcing has been performed.  Only when entire spend segments have been properly leveraged can sourcing yield the benefits designed.

 

Misconception #2 - Strategic Sourcing requires Competitive Bidding:  This popular misconception fails to recognize that collaborative negotiation is one of the key techniques used by advanced supply management groups in the Strategic Sourcing process.  When we teach corporate procurement groups how to analyze specific spend categories, and put together a sophisticated sourcing strategy (we have a great three day onsite training workshop titled Expert Strategic Sourcing™), one of the key techniques is to correctly-identify sector attributes and choose a pathway (either Competition or Collaborative Negotiation).  

 

 A study of 5,000 procurement groups performed several years ago by the Institute of Management Administration (IOMA) found that the single-most-beneficial "best practice" they utilized was "renegotiation of existing supplier relationships".  

 

But for Strategic Sourcing to have been performed in processes which may involve collaborative negotiations rather than bidding, again a sourcing strategy methodology must have been designed, explored, and leveraged.

 

Misconception #3 - Strategic Sourcing results in more work for Supply Management:  False.  While the extensive requirements to do sourcing do take quite a bit of initial time, true sourcing reduces the transactional activities of the procurement team in several ways:

 

First, proper sourcing actually consolidates the supplier base by a factor of 2x to 3x.  Fewer suppliers should be used, since a proper selection path has been followed that narrows down the qualified suppliers in each spend category (in many cases, establishing single source supply relationships).

 

Second, proper sourcing results in long-term contracts being awarded.  Less-frequent renewals and contract preparation should result in greater time availability from sourcing personnel.

 

Third, with the establishment of long-term contracts and implementation of eProcurement ordering technologies, procurement should be involved in a lesser degree of transactional purchasing activities.

 

These are just a few misconceptions which exist today about whether Strategic Sourcing has actually been done.  More certainly exist.  The failure to recognize whether proper sourcing strategies have been applied means that value and efficiency have still not been achieved. 

 

Readers who are automobile fans know what it means to "blueprint" an engine. The "blueprint" methodology doesn't just tune up an existing engine, but rather takes that engine completely apart and measures/machines each of its components to match optimal design. Only then is the engine re-assembled so it can run perfectly.

I would suggest that more organizations really need to "blueprint" their procurement and supply chain operations rather than assuming they are truly having a "strategic impact". Some procurement teams with skilled management try to do this themselves, if they have access to several weeks of time and external benchmarks and process flow mapping techniques. But most groups prefer to utilize an objective third party perspective of an external consultancy like Strategic Procurement Solutions.

 

Strategic Procurement Solutions often evaluates client companies' procurement and supply chain efficiency using our proprietary 360o Supply Management Efficient Review process. Our process takes just a few weeks, and evaluates many factors to identify key benefits for improvement which are presented to the client's management team in a detailed written report. More information can be requested at Info@StrategicProcurementSolutions.com

 

About the Author:  Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions' founders.  His 37 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation's procurement operations.  He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University - Hayward and St. Mary's College - San Francisco.  He has also worked with major corporate and governmental clients in the consulting industry for the past 18 years, and was one of the founders of Strategic Procurement Solutions.   Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia.  He is a noted author, with recent articles in eSide Supply Management and Strategic Procurement Solutions' own Best Practices in Supply Management Journal (the latter of which is now distributed to over 13,000 readers).

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