At a glance
- Contracts are vital to manufacturers
- Having the correct paperwork in place can prevent nasty surprises down the line
- Zurich can help customers better understand the risks that they are taking on
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Contracts are the glue of modern business relationships, although some manufacturers may not be aware of all the potential risks that they are taking on when they clinch a deal.
Robust supply chains are crucial to the success of many manufacturers and with these linkages getting ever longer and more inter-connected due to increasing globalisation, both in terms of suppliers and customers, it has never been more important to get the correct contracts in place to negotiate any possible pitfalls.
Insider caught up with Nick Wildgoose, Zurich’s Global Supply Chain Product Manager, an expert in supply chain risk, to find out more.
Q: Taking legal advice before you sign a contract is definitely a must, but what other things should manufacturers be aware of prior to agreeing terms?
A: Manufacturers need to understand what the service or product is you are contracting for and how much of that risk you want to take on. For example, if you as a manufacturer provide a retailer goods and products at a certain time, you are reliant on a supplier to do that. You might be agreeing to make penalty payments if you miss that deadline for that retailer. Clearly, you need to understand what risks you are taking on and what the penalties will be, and passing them back to the supplier as appropriate as you can.
Obviously in doing that you need to be cognisant of your capability of taking on risk, the supplier’s capability of taking on risk and how much risk you are willing to take on from the customer as well.
Q: And how can Zurich help manufacturers with this?
A: We can help to understand alongside your broker the insurance coverage with regard to the allocation of risk and the adequacies of policies that are in place in respect of the relevant contract exposures.
Q: What else should be considered before entering into a contract?
A: You need to have thought about the clauses carefully and how you would like the risks allocated. The liabilities and indemnities clauses are always a key area to determine your relevant risk tolerance.
One that is a boilerplate in many contracts is the force majeure clause. Manufacturers should not just accept what a supplier has given them. We understand the supplier can’t control true acts of god but there are certain ways they can mitigate some of them. If it is not properly negotiated, it sometimes lets the supplier get away with things.
Another aspect to consider not only the risk you are taking on but, if you consider the supply situation, that of the supplier too. If you are trying to put risk on to them are they really capable of taking this on? And do they have appropriate insurance coverages?
Q: Breaches of contracts or warranties add huge risks to manufacturers. How can you stop these happening?
A: A breach can just be failing to perform against a service level right up to a fundamental breach of the contract – and you are in danger of invalidating your whole contract.
Joined-up thinking is required. Very simply, if you over-promise to your customer that you can deliver in two weeks but your manufacturing team know the earliest date is eight weeks you are giving yourself real problems.
There is a better awareness now that contracts represent the fundamental building block of a commercial relationship between two organisations. But there are still challenges around the governance of contracts within a business and implementing controls on a central basis in an appropriate way. This should include a multi-functional approach to the development of the contract, to ensure all insights are properly represented.
Q: Contracts can also protect a company in the event of supply chain failures. But what other actions should manufacturers be doing to protect themselves from supply chain risk?
A: Obviously, the growth of globalisation is only likely to increase complexity and risk in the supply chain. Going from sourcing material from Europe to across the globe brings a whole series of different issues. Therefore, you need to change your business model.
One is you try to consider the total lifetime cost of ownership of a good or service. Not all manufacturers are factoring in, say, the risk costs of doing something. A UK manufacturer may go out to China because they can get goods 20% cheaper but they don’t factor in not getting these goods and the production line stopping for a few days – which blows the outsourcing savings right away.
Appropriate due diligence of suppliers and mapping of the relevant supply chain is critical. A number of studies have shown that in around 60% of cases, it is the direct supplier that causes a supply failure, while 40% of causes are with suppliers below that direct supplier.
You need to have thought about contract clauses carefully. Manufacturers can sometimes just accept clauses that a supplier has given them
Nick Wildgoose, Global Supply Chain Product Manager, Zurich
Robust supplier business continuity plans are also essential. This is something Zurich can help with.
Q: And finally, why should you be thinking about exiting a contract before you have even signed it?
A: This is very important. You are at the peak of your negotiating powers before you bind with a supplier and sign a contract. But unfortunately, as soon as you pay over the money or pay a deposit and start on that service then immediately you have lost quite a lot of your power in the relationship. You become tied in, so it is important you think about the exit before you commit.
For more information on protecting your supply chain, go to www.supplychainriskinsights.com