As both eprocurement experts and suppliers know, esourcing a product involves more than just physical acquisition. Considering the array of product recalls that frequently happen, it’s clear that verifying products meet certain standards can be challenging if the right monitoring systems aren’t put in place.
Defects are not always tangible: more and more, especially as markets become increasingly globalized, companies are building labor standards, fair trade requirements, and environmental policies into their supplier contracts. This makes it critical for both parties to have effective ways of supervising what’s in their contracts to spot possible problems that may arise in the esourcing.
A recent Supply Management article demonstrates how suppliers can be damaged by not paying attention to contract terms. Undertaking an audit of their suppliers last year, Apple uncovered underage labor, environmental concerns, and false documentation at some facilities. They ended their relationships with 18 suppliers, putting several others on probation.
Beyond defining product standards and quantities in its contracts, Apple built human rights policies into its supplier agreements. This kind of “contractual ethics” is becoming very common, and every company has the opportunity to make ethical concerns part of their brand. Often, however, these ethical clauses are legally mandated.
For instance, a construction company ended up paying $12 million last year for misrepresenting how many women and minority subcontractors they used for an Illinois public works project.
The impact of contracts for both buyers and suppliers goes beyond meeting deadlines and price concerns. Contracts can make or break an enterprise based on the legalities they contain. Apple was wise to audit their suppliers before a third party discovered the violations.
With all of the complexities and increasing regulations surrounding supplier contracts, your best choice is to utilize the right tools. Since every supplier relationship begins with a contract, using your contract life cycle management (CLM) system effectively is imperative. With this software, you can identify risks and compliance issues within your existing contracts, and create new ones with templates and required elements.
In addition to the smart development of contractual language, companies need the ability to evaluate suppliers on an ongoing basis to ensure compliance. Using an organized system for supplier information management can streamline this process and head off conflict. In the end this will be the best way to stay on top of your esourcing strategies to bring in the highest ROI possible.