Breaking Up Is Hard to Do: Tips for Handling Supplier Terminations
Date: July 08, 2016
The decision to end a supplier relationship can be a difficult one, often reached only after multiple attempts to fix problems have failed and various alternatives to termination have been fully considered. When the decision is finally made, the focus turns to effecting the termination and transitioning to a new supplier as quickly and seamlessly as possible. Having reached this stage, it can be frustrating to encounter legal issues that delay the conversion or require a change in strategy. Even worse is a legal dispute that causes delay and significant unanticipated costs.
To minimize these risks, consider the following strategies at the outset of any discussion about a possible supplier termination.
Review the Contract Closely
Supplier terminations are typically triggered by performance issues, and discussions about potentially ending a relationship will naturally center on those problems. But while business factors may be the foremost consideration, contractual requirements must not be overlooked. A supplier’s failure to meet certain quality or delivery benchmarks may not be enough to permit termination of a contract, even when those failures have been ongoing problems. And even when termination is contractually justified, there may be notice requirements or other steps that must be taken before the contract can be ended. Analysis of the contractual “exit strategy” should be part of the termination discussion from the beginning.
While communications with and about suppliers should always be structured and focused, this practice is especially important when discussing the termination of a supply relationship. Preliminary deliberations should be strictly confidential, and once a decision is made, the internal and external messages regarding that decision must be straightforward and consistent. Provide appropriate talking points or similar guidance for those who deal with the supplier or others who may be affected by the termination, and discourage needless “chatter” about the situation. Mixed messages or back-channel communications can lead to unnecessary legal complications.
Plan for Recovery of Key Property
Supplier relationships often involve the sharing of equipment (such as tooling or machinery) or technology (such as engineering drawings, software or formulas). Ideally, ownership of this property is clearly established in the contract, but often there are gray areas that must be considered (e.g., who owns design improvements or other modifications made since the beginning of the relationship). Even when ownership is clearly defined, recovering the property may prove challenging if the supplier is uncooperative. These issues should be carefully evaluated and a plan to successfully navigate possible problems developed well before the termination is executed.
Prepare for Disruptions
Even the most rigorous analysis of potential problems can fail to anticipate an issue that could interfere with or delay the transition to a new supply source, so it is important to develop strategies to address temporary supply disruptions that may result from a termination. While this could be as simple as stockpiling extra inventory as a cushion, it might also involve preparing for a temporary plant shutdown or evaluating contractual commitments to customers who would be affected by an interruption in production. Considering worst-case scenarios can also help clarify the indirect risks involved in supplier terminations and facilitate better planning and decision-making.
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