For several years now, we have watched logistics penalties in the large retail sector spiral upwards. The trend, amplified by the recent crises (Covid-19, the war in Ukraine, inflation, etc.) that have upended international markets, has led retailers to toughen their sanctions where logistics problems arise, with the aim of reducing late or missed deliveries, or deliveries of missing or non-compliant products.
By way of illustration, the penalties imposed by the large retail chains are reported to exceed €250m a year. A considerable financial loss for manufacturers.
Against this backdrop, and in the search for ways to limit this downstream risk, one avenue is to move back up the chain in order to tighten obligations around raw material procurement and transport and to ease supply pressures.
How can the contract manager support the various operational departments in this drive to reduce logistics penalties? We share our thinking on the subject in this article.
Logistics penalties, a real issue in commercial negotiations
2022 was billed as a record year for penalties imposed by the large retail chains. Although this system of sanctions for supplier default is legitimate, its financial impact and its effect on company profitability are particularly significant, so much so that over the past two years it has become a major point in negotiations between suppliers and retailers.
Just like discussions on purely commercial matters, talks on framing logistics penalties are particularly tough and the outcome is often mixed. Each camp's logistics stakes, which pull towards different objectives, the weight of each party and the failure to take the manufacturer's specific circumstances into account all make these negotiations more complex.
Given these difficulties, betting as much as possible on securing sourcing upstream can prove a paying strategy (in the positive sense of the word). (Re)negotiating raw material supply contracts or logistics service contracts with a view to reducing penalties is no easy matter either, especially in an unfavourable economic climate marked by supply pressures and difficulties in finding labour, notably for moving goods. On top of production's own requirements, it means factoring in the constraints faced downstream in the supply chain and by the sales teams, and tightening the obligations of your suppliers and service providers.
The support of a contract manager can prove valuable in steering this process and in expressing and prioritising all the requirements clearly.
What role does the contract manager play in keeping the supply chain running smoothly?
Contract management very often plays an important part in minimising penalties and optimising the upstream contractual relationships between the parties involved.
One of the main functions of contract management is to ensure contracts are managed effectively throughout their lifecycle. That covers the initial negotiation, setting up and implementing the contract, monitoring performance and, finally, resolving potential disputes. Well-run contract management & administration can help bring logistics penalties down, or lead to a compensation mechanism, by identifying and addressing potential problems for each party from the very start.
The contract manager's involvement can take the following forms:
Preparing for the negotiations
The contract manager works closely with the procurement teams to gather all relevant information on existing contracts, suppliers' past performance, whether diversifying sources of supply makes sense, and operational requirements; a thorough analysis of supply chain risks also makes it possible to identify the critical points that could lead to shortages.
To take full account of these requirements, they act as the link between the company's departments, making sure information flows transparently. This guarantees a shared understanding of internal expectations and allows the difficulties raised to be resolved effectively and jointly.
By carrying out a thorough analysis of established and potential risks, they help anticipate the challenges that may arise during the negotiations. This work also leads them to identify areas for improvement and opportunities.
They can help identify potential suppliers, assess bids and negotiate favourable terms, taking into account both the legal aspects and the commercial objectives.
Their role as a catalyst between the various departments helps, during this preparation phase, to set clear objectives for the negotiations so as to secure the company's production and sales activity.
Support during the negotiations
- During the negotiations, the contract manager takes an active part in discussions to ensure that the interests of every department in the company are protected, and can step in to resolve emerging sticking points quickly so as to avoid any delay in the negotiation process.
They will make sure that all parties fully understand their responsibilities and obligations, as well as what is at stake, in order to frame and mitigate the risk of contractual breach as far as possible. Defining these aspects clearly will encourage the introduction of mechanisms for dealing with supply chain disruption or other problems with a degree of responsiveness and proactivity.
At the end of the negotiation, each party must therefore hold a clear contract that unambiguously sets out the manufacturer's requirements, in particular regarding:
• The compliance of raw materials
• Compliance with regulatory and/or legal requirements
• Compliance with service rates
• Securing volumes
• Prompt notification of stock-outs or late deliveries, their causes, responsibility for substitute solutions and the time needed to return to normal. The manufacturer's justification of the breach to the retailer will rest on the supplier's justification of its own contractual obligation.
• The application of penalties in the event of breach or, where appropriate, the supplier's or service provider's contribution to the logistics penalties imposed by the retailers, etc.
• The presence of key performance indicators (KPIs) linked to contract performance. This allows the supplier's or service provider's performance to be assessed regularly, identifying the areas that need improvement.
• Adjustments to the contract in the event of a change in the market or in demand (price revision or volume adjustment mechanisms).
Support in monitoring the contract
Once the negotiations are concluded, and this is part of their remit, the contract manager works alongside the operational teams and monitors contract performance. Where there is non-compliance or an operational difficulty, they step in quickly to resolve the issues, thereby reducing the risk of disputes.
This calls for the automation of processes, which is the key to efficient monitoring and to team responsiveness. The more responsive you are, the faster you pass the information on and the faster you bring solutions to limit disruption to the retailer's logistics, the better you protect yourself against penalties. This optimisation also makes it possible to identify inefficiencies, duplication and gaps in the flow of exchanges, and to consider ways of improving.
Monitoring KPIs regularly also brings weaknesses to light and makes it possible to correct course quickly so as not to swell the penalty base. What is more, as part of improving your supply chain, it can serve as a basis for renegotiating contracts or for choosing new commercial partners.
Conclusion
In conclusion, managing logistics penalties, especially in the world of large retail, calls for a proactive and collaborative approach. Rather than simply reacting to problems, supply chain players can turn these situations to their advantage to optimise their purchasing processes, strengthen the resilience of the logistics chain and improve customer satisfaction.
By supporting the proactive management of contracts, contract management helps put in place effective exchanges and mechanisms in the preparatory phase, in the negotiation and in the monitoring, and enables an approach that both strengthens the chain's resilience and reduces penalties.