24 Questions
What happens to SOWs in outsourcing relationships?
They dictate conventional and less-than optimal ways of performing tasks
Why do internal departments create requirements that only the incumbent supplier can provide in an RFP process?
To favour the incumbent supplier and prevent change
What is the 'Honeymoon Effect' in outsourcing relationships?
The stage where both parties go through a period of excitement and high expectations
What prevents partners from raising service levels beyond what's contained in the Service Level Agreements?
The lack of incentive to improve performance
What opportunity is frequently dismissed in outsourcing relationships?
The opportunity to bring innovations to the table
What is 'Sandbagging' in contract manufacturing or logistics?
The practice of withholding innovations until the contract end date
Why do suppliers bring innovations to the table towards the end of the contract?
To secure a new agreement and maintain the relationship
What is the outcome of not managing outsourcing relationships effectively?
Rigid and conventional ways of performing tasks
What is the primary purpose of determining metrics and reports in supplier management?
To manage the business and determine the frequency of reports
What is an example of a fully integrated reporting process for sharing sales data?
Walmart's Retail Link
What should be included in a well-structured contract?
A balanced risk versus shifting risk to a supplier
Why is it important to regularly review pricing models and risk assignment?
To ensure the supplier is compensated appropriately
What is the benefit of a longer-term contract?
Encourages suppliers to make long-term investments
What should be considered when determining the contract length?
The payback period for suppliers' investments
What is the purpose of developing a thoughtful plan to introduce improvements?
To reduce total program risk
What may happen as the supplier gains more experience?
The contract type evolves into a more strategic form
What is a typical characteristic of strategic contracts?
Contract terms in excess of five years
What is the purpose of including incentives in a pricing model?
To promote behaviors and outcomes that benefit both parties
What is a key component of a good contract, as mentioned in the Element 7 Relationship Management Framework?
Clear outlines of all six relationship management components
What is the primary purpose of transformation management in a supplier contract?
To ensure the supplier meets necessary milestones
What is an example of a change that may impact key elements of a supplier agreement?
Change in the bill of materials for a component supplier
What is a provision that may be included in more strategic supplier relationships?
A provision for the parties to develop a continuous improvement process
What is a key aspect of a formal change management process in a supplier agreement?
The process outlines how changes will be handled by both parties
Why is it important to have a clear outline of the relationship management framework in a supplier contract?
To clearly define the relationship management components
Study Notes
Element 5 Performance Management
- Trading partners should determine metrics reports and frequency to manage the business
- Performance reporting can be as simple as an Excel spreadsheet or fully automated and integrated, like Walmart's Retail Link
- Partners can access sales data via an Internet portal, tracking product performance in near real time
Element 6 Pricing Model
- Contracts should outline pricing or the pricing model to compensate suppliers
- Pricing models should consider balancing risk and include a plan to introduce improvements that reduce total program risk
- Partners should regularly review pricing models and risk assignments over the contract's life
- Contracts can evolve from transaction-based to outcome-based pricing models as the supplier gains experience
- Contract length should be commensurate with the payback period for suppliers' investments
- Incentives should be included in the pricing model, promoting behaviors and outcomes that benefit both parties
Element 7 Relationship Management Framework
- Contracts should clearly outline the relationship management framework
- A good contract will outline all six relationship management components
Element 8 Transformation Management
- Contracts should outline transition expectations, including project milestones, reviews, and escalation paths
- A formal change management process should be outlined, including how to handle changes impacting the agreement
- More strategic relationships may include provisions for continuous improvement processes
The Honeymoon Effect
- Both parties go through a honeymoon stage at the beginning of a relationship
- The level of excitement wanes after the initial ramp-up, and performance levels may not improve beyond the contract's expectations
- There is an opportunity to use lessons learned to develop innovative new ways to deliver desired outcomes, but it's often dismissed due to lack of incentives
Sandbagging
- Suppliers may bring innovations to the table near the end of the contract to secure a new agreement
Learn about elements 5 and 6 of supply chain management, including performance management and pricing models. Understand how to determine metrics, access sales data and compensate suppliers.
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