Entrepreneurs

Council Post: How Contract Renegotiation Can Make Supply Chains More Adaptive And Resilient

By Andrew Butt, co-founder an CEO at Enable, a modern, cloud-based software solution for B2B rebate management.

The Covid-19 pandemic forced manufacturers and distributors to adapt to a rapidly changing set of circumstances in real time. Supply chains were severed, consumer demand shifted drastically overnight and production schedules were suddenly upended. These are all reasons why many companies scrambled to renegotiate contracts that were conceived before a once-in-a-century pandemic was sweeping around the world.

Contract negotiation is always difficult, as it requires companies to account for a wide range of contingencies and develop terms that both parties accept. These issues only become more complex in times of crisis — forecasting is more difficult, logistics are thrown into disarray and performance is harder to track. To account for all these variables, it’s necessary for manufacturers and distributors to renegotiate contracts — a process that brings companies into alignment on timetables, performance targets and rebates. When companies agree to renegotiate, they’re often in a stronger position to identify problems, implement more efficient processes and maintain healthy interactions with one another.

Contract renegotiation should lead companies to reframe their relationships. By continually reassessing agreements to keep them in line with what’s happening in the real world, companies demonstrate their commitment to the maintenance of productive and resilient partnerships that work for all parties.

Contracts Should Never Be Static

Covid-19 was a major stress test for supply chains around the world — the vast majority of companies saw significant disruptions, while almost three-quarters said the pandemic had a negative effect. The consequences of these disruptions were apparent in all sectors — from a computer chip shortage that cost the auto industry billions of dollars (and sent prices of used cars soaring) to a lack of essential medical equipment in the early days of the pandemic.

These are all reminders that contracts shouldn’t be viewed as fixed agreements that companies have to observe no matter what. Instead, they should be flexible tools that are part of an ongoing collaborative relationship between manufacturers and distributors. This won’t just help partners navigate a crisis like Covid-19; it will also give them the resources they need to keep pace with economic changes, customize agreements to ensure that both parties are satisfied and identify areas where it’s possible to increase efficiency and productivity while mitigating risk.

Contract renegotiation is also an essential tool for addressing mistakes and disputes. When companies are accustomed to negotiating and implementing ad hoc agreements, their supply chain logistics become more dynamic, transparent and adaptable.

When Is It Time To Renegotiate?

There are many reasons manufacturers and distributors may decide to renegotiate their B2B contracts. Perhaps sales figures were much higher or lower than anticipated. Or maybe there was an error in the original contract that prevented companies from getting the most out of their partnership. Over the past year, many companies needed to renegotiate because Covid-19 had such a dramatic effect on markets and workforces.

While renegotiations are vital for responding to unpredictable developments like shortages, shifts in consumer behavior or shocks like Covid-19, companies should take a broader view of how they can be applied. Renegotiations help companies find value in unexpected places, increase efficiency and resilience, and improve supply chain visibility, all of which executives in the sector rank as top concerns. When partners have the ability to fine-tune their contracts and make adjustments in real time, they can identify and address weak links in supply chains more quickly, set up rebate systems that account for changing conditions, address each partner’s unique needs and ultimately increase revenue.

It’s common for companies in the supply chain sector to automatically renew contracts, but this status quo can be costly. Problems and opportunities are easier to miss when companies aren’t actively looking for them, and when partners don’t make the most of their relationships, those relationships tend to deteriorate. Contract renegotiation is a way to prevent that from happening.

How To Make The Most Of Renegotiations

The first step toward a successful renegotiation is determining what your partner’s priorities and pain points are, where your interests overlap and where those interests may diverge. The process of developing and implementing contracts can be arduous, and there’s no reason to make it even more difficult by failing to be upfront about issues that will inevitably arise. Partners have to understand one another before they can work together productively, which is why the renegotiation process should be as transparent and collaborative as possible.

While contracts should always be living documents that are subject to change, companies should make sure they’re based on the best available information. This is why forecasting is central to the renegotiation process — companies need to consider factors such as potential shifts in the economic landscape, changing consumer sentiments and new Covid-19 developments to determine which types of contracts make the most sense.

Partners also need to conduct due diligence on one another to avoid any surprises after the new contract has been signed. To keep track of the renegotiation and how it’s executed, partners should use a centralized digital system that will allow them to gather and analyze large amounts of data, adjudicate disputes and avoid the mistakes that are made when companies use outmoded tracking resources like spreadsheets (which, according to my company’s research, over one-third of supply chain professionals still rely upon).

Supply chain partners should never view contract renegotiation as a zero-sum process. By focusing on how both signatories can benefit from a more streamlined and flexible relationship, a new contract can facilitate open communication, build trust and catalyze growth.

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