On negotiations for a long term contract with your transport supplier, how would a clause be written to state the need of continuous improvement in the logistics processes that would lead, after a period, to the review of the previous conditions?
We would also like to enforce the supplier to present on a 6 months/1 year basis projects leading to optimize processes.
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Gerald R
Currently Seeking a New Opportunity
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Xavier,
What you may want to consider is a Service Level Agreement which would set out Key Performance Indicators along with short and long-term service levels which you would expect the transporter to achieve. The periodic review of new efficiencies can be written in as well. As Michael has suggested a financial "risk/reward" circumstance is very powerful but in the long run, if I understand correctly, you want the transporter to bring new innovation which will enhance their capabilities and make them more efficient which in turn should bring about lower costs to you. If thats true then by making themselves better they will enhance their chances of a longer term relationship with your firm, their reward for being a good partner. Their risk with no innovation they are competed more often with others that are more aggressive in their best practices implementations. Penalty/Bonus plans sometimes work and sometimes not, It is important, if you do implement these types of plans, to ensure that the penalty is severe enough to make it painful for them to just write a check and the bonus enticing enough to make them want to implement new practices. I lean more toward partnering and the lure of a longer term relationship which provides steady growth and income for them and higher efficiency and lower costs for me rather than short-term bursts ending in competition which takes time and money and the possibility of one transition after another. The debate can go on forever on these types of arrangements its up to you and the business team to determine the best practice for your organization.
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Michael M
Vice President, Supply Chain at AMD
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Xavier, you should be able to write the clause almost exactly as you state it in the question.
We have used a "Reporting and Quality Improvement" section in previous agreements. In the clause, we define the reporting requirements in terms of frequency and content. If you have a regular scorecard and supplier evaluation process, you can include that in the agreement. You can also call out that the scores will be based on your company's (the customer) requirements and that there will be a minimum expected level of improvement year-over-year.
One way to make this work even better is to tie long-term compensation to the supplier based on achievement of those goals. Or, in reverse, you (the customer) get a discount on services based on how much they miss the goal by. Either way, a financial incentive is very strong.
I hope this helps.
