Contracting Excellence in Procurement and Supply - Case Study Example

Contracting Excellence in Procurement and Supply Name: Tutor: Course: Date: Executive summary The legal implications of overcharging suppliers affect the formation of supply chain relationships and the implied and express terms used. There are regulations that impact on procurement and supplies, and other hand, legal implications also influences the non-contractual capacities of parties to a contract. Risks affect the quality and efficiency of supply chain processes. These risks require analysis and assessment in a broad framework of supply chain risk management. Risk assessment matrix and risk register are some of the tools to assess and document the project risks. First, this report examines the creation of legal agreements and sources of law in business contracts with suppliers. Sources of express terms and impact of legal agreements on relationships, legislations of contracts are investigated. The report also considers dispute resolution, core clauses and recommendation for remedies to the breach of contract. Second, the report evaluates the key risks that firms outsourcing work to suppliers face by examining the risk evaluation tools, project partnerships, contract forms, contracting options, project methodologies and monitoring or closure of projects. Thirdly, the report proposes key clauses that need to be included in the contracts so as to achieve value for money. Table of Contents Table of Contents 2 List of Figures 4 1.0 LEGAL IMPLICATIONS OF OVERCHARGING SUPPLIERS 5 1.1 Overview 5 1.2 Legal issues in the formation of supply chain relationships 5 1.3 Implied and express contractual terms in procurement supply chain 6 1.4 Regulations that impact of procurement and supplies 7 Figure 1: Model form contract for consulting service 8 Table 1: Model contract form in supplier relationships 8 1.5 Legal implications of contractual non-performance in procurement and supply 9 2.0 KEY RISKS IN OUTSOURCING WORK TO SUPPLIERS 9 2.1 Overview 9 2.2 Supply chain risk management 9 2.3 Risk assessment matrix 10 Figure 2: Risk assessment matrix 10 Table 2: Risk register for outsourcing work to suppliers 10 Figure 3: Risk management model for outsourcing 12 2.4 Outsourcing contracting and negotiation risks 13 Figure 4: Outsource risk management framework 13 Figure 5: Gantt chart for actioning supplier risks 14 3.0 RECOMMENDATIONS 15 Reference list 16 List of Tables Table of Contents 2 List of Figures 4 1.0 LEGAL IMPLICATIONS OF OVERCHARGING SUPPLIERS 5 1.1 Overview 5 1.2 Legal issues in the formation of supply chain relationships 5 1.3 Implied and express contractual terms in procurement supply chain 6 1.4 Regulations that impact of procurement and supplies 7 Figure 1: Model form contract for consulting service 8 Table 1: Model contract form in supplier relationships 8 1.5 Legal implications of contractual non-performance in procurement and supply 9 2.0 KEY RISKS IN OUTSOURCING WORK TO SUPPLIERS 9 2.1 Overview 9 2.2 Supply chain risk management 9 2.3 Risk assessment matrix 10 Figure 2: Risk assessment matrix 10 Table 2: Risk register for outsourcing work to suppliers 10 Figure 3: Risk management model for outsourcing 12 2.4 Outsourcing contracting and negotiation risks 13 Figure 4: Outsource risk management framework 13 Figure 5: Gantt chart for actioning supplier risks 14 3.0 RECOMMENDATIONS 15 Reference list 16 List of Figures Table of Contents 2 List of Figures 4 1.0 LEGAL IMPLICATIONS OF OVERCHARGING SUPPLIERS 5 1.1 Overview 5 1.2 Legal issues in the formation of supply chain relationships 5 1.3 Implied and express contractual terms in procurement supply chain 6 1.4 Regulations that impact of procurement and supplies 7 Figure 1: Model form contract for consulting service 8 Table 1: Model contract form in supplier relationships 8 1.5 Legal implications of contractual non-performance in procurement and supply 9 2.0 KEY RISKS IN OUTSOURCING WORK TO SUPPLIERS 9 2.1 Overview 9 2.2 Supply chain risk management 9 2.3 Risk assessment matrix 10 Figure 2: Risk assessment matrix 10 Table 2: Risk register for outsourcing work to suppliers 10 Figure 3: Risk management model for outsourcing 12 2.4 Outsourcing contracting and negotiation risks 13 Figure 4: Outsource risk management framework 13 Figure 5: Gantt chart for actioning supplier risks 14 3.0 RECOMMENDATIONS 15 Reference list 16 1.0 LEGAL IMPLICATIONS OF OVERCHARGING SUPPLIERS 1.1 Overview This section of the report examines the creation of legal agreements and sources of law in business contracts with suppliers. Sources of express terms and impact of legal agreements on relationships, legislations of contracts was also investigated. The report also considers dispute resolution, core clauses and recommendation for remedies to the breach of contract. 1.2 Legal issues in the formation of supply chain relationships Between 2009 and 2013, Centrica British Gas, the British largest energy supplier and five others were found to have overcharged households by £1.2 million (Schaps & Chestney, 2015). Competition and Markets Authority (CMA) admitted that energy firms were acting outside the law and were exploiting consumers. The authority proposed price capping to protect consumers from high tariffs (Schaps & Chestney, 2015). In view of the above activities of suppliers in overcharging consumers, the legal aspect and implications is sought (Connor, 2010). Procurement and supply activities in organizations are governed by contracts that have legal basis from both criminal and civil law. While criminal law covers boundaries of acceptable conduct, civil law covers areas on family matters, negligence and contracts (Prickett, 2013). Regarding contracts, the different countries have varied interpretation and understanding of contracts. However, a common definition has been accepted that a contract is a verbally unwritten agreement or written document, gentleman handshake, simple body language, and encoded or cryptic message (McKendrick, 2009). Jurisdictions with anti-cartel laws have contracts hidden and enforced by cartel members. However, in cases where there are industry exemptions or no anti-trust laws, contracts are enforceable in a court of law or publicized. Contracts are formed where there is an invitation to treat, offer, acceptance, consideration in monetary terms and the intention to create legal relations (Gillies, 2004). The process of formation of contractions between suppliers and purchasers is based on willingness on both parties to enter into the contract. However, if they contract is misrepresented, misguided or deceiving, then one party may sue for non-performance or frustration of the contract. In some situations, suppliers accused of overcharging are held for systematic overcharging fraud and the agreements are terminated (Prickett, 2013). Legal relationships in supply chain can be affected by regional laws and legislations. In the United States, no exception is made for suit involving public regulated utilities to pass on costs to customers through indirect purchaser rules. In Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 48, a pipeline company was sued by utilities for unlawfully conspiring to inflate gas prices. The increase in prices has decreased customer sales. The court held that the public utility had violated the anti-trust laws by overcharging purchasers of natural gas. Indeed, the court established that the utility had the cause of action because it had suffered antitrust injury despite passing the overcharge to customers. From the case law above, the aggrieved party was able to sue the supplier for violating the terms and condition of the contract. 1.3 Implied and express contractual terms in procurement supply chain Mallett (2012) suggests that the express terms used in procurement and supply contracts include principal, agency, confidentiality, undue influence and duress, negligence, fraud, bribery and corruption. A principal has legal capacity to undertake a contract. They include government agencies, partnerships, corporations and persons. A principal may enter a formal agreement with agents to carry out duties on their behalf such as property sales or purchase (Gillies, 2004). For example, if the principal is engaged in Hair Products supplies and distribution through agents, the agent should not take advantage to increase transportation costs or selling prices that has not be expressly or impliedly authorized by the principal. Novation is replacement of a party in a new agreement or adding or replacing obligation to performance. In this case, the original obligor must consent to the new contract with full transfer of duties and obligations. Confidentiality agreement is a legal contract where parties agree not to disclose information under the agreement especially non-public business information (McKendrick, 2009). For example, the business directors, share ownership and their roles should be confidential in an agreement since they are restricted under the usage and provision of materials. Fraud is the removal of assets or funds from an organization or intentional misrepresentation of financial position to mislead regulators, tax department and shareholders. Falsifying signatures and misrepresenting the positions of parties to a supply of goods contract is fraudulent (Marcar, 2015). Legal agreements have impact on the relationships between the parties involved in the supply chain. For example, arrangements between the purchaser and supplier may have been good for a number of years. However, apparent increase in costs with no explanations given by the supplier could increase the risk of fraud in procurement (Gillies, 2004). Despite public understanding that the increase could be attributed to legitimate upgrades in product or service quality and rising inflation levels, the practice could be taken as fraudulent overcharging (Marcar, 2015). The aggrieved party could still sue for damages or violation of the terms of contract. Bribery and corruption is an offering or receipt of benefits for director, employee or officeholders to gain or give improper assistance. The aggrieved parties can sue for breach of duty. Undue influence and duress applies to situations where due to the relationship between two parties, one is able to persuade another to a decision, hence taking advantage. On the other hand, duress is a situation where people perform acts based on pressure, threats and violence (McKendrick, 2009). For example, in contract law, a purchaser may have been under duress to sign a contract with a supplier to accept new terms or quit the offer. They may also be coerced to forfeit part of their ownership to gain a new business contract. In such cases of undue influence and duress, the victim is void to the terms of the contract or agreement. Negligence is failure to exercise duty of care against injury for reasonably foreseen risks or injury (Gillies, 2004). For example, financial loss due faulty and injurious product against agreed product liability by a sporting equipment supplier can necessitate the buyer to bring negligence claims for conditions that establishes a duty of care. 1.4 Regulations that impact of procurement and supplies There are a number of regulations that impact on procurement and supplies. Supply of Goods Act 1982 is one of the legislations under contract for supply of a service or hire of goods in the United Kingdom (The National Archives, 2014). In implied terms, the contract means hire-purchase agreement, contract of sales of goods and agreement to transfer. Remedies for breach of statutory condition are treated as a breach of condition and the plaintiff has the right to treat the contract as breach of transferor. Under express terms are Model Form Contracts which are pre-existing terms that are understood by contractual parties and help to lower the timescales of sourcing or tendering and negotiation of specific terms (The National Archives, 2014). The model widens communication, essential in proactive risk management and willingness to solve problems as a team. In procurement and supplies, the Model Form Contract for procurement is as shown in the figure below. (Source: McKendrick, 2009, p.15) Figure 1: Model form contract for consulting service As shown above, the model for contract for consulting service sets out the roles, rights and responsibilities of the contract. Although it can be a one-off contract or long-term framework, it has the simplest form of structure. The key terms in model form contracts are responsibilities of contractor and purchaser, contract pricing, insurance, meetings, indemnities of contraction, work acceptance, dispute resolution, Force Majeure and suspension of works. The merits and demerits of model form contracts in supplier relationships are as shown in the table below. Table 1: Model contract form in supplier relationships Merits Demerits Reduces legal service costs in contract development and time Negotiated contracts may be less advantageous to powerful buyers Flexible and easily adopted to suit specific circumstances Requirements and special clauses covering buyer position are not covered Negotiation costs and time are reduced given the wide acceptance of industry model forms Variations and significant amendments still require legal advice Fairness to both parties Costs incurred to train buyers into using the model 1.5 Legal implications of contractual non-performance in procurement and supply A contract can be terminated over non-performance or successful performance. The main remedies are contractual provisions on performance, clauses for default, service credits and notices, assessment of consequential loss, liquidated damages, unliquidated damages and penalties (Prickett, 2013). In common law, the terminating a contract must show a breach of an essential term or repudiation of contract by one party. When a purchaser has grounds to establish that the supplier has overcharged for delivery of services or goods, they can terminate the contract. The obligation of parties on termination of a contract is discharged by further performance (McKendrick, 2009). The innocent party (consumers) will have a right to damages while the supplier has the right to restitution. Although the accrued rights are not eliminated from partial performance, special performance will not be available at the event of termination even of accrued obligations. However, the amounts due must be paid prior to termination. The legal consequence of terminating a supply contract is that the plaintiff can sue for damages or serious breach of non-essential terms (McKendrick, 2009). Damages to purchasers can be assessed and contractual warranties and conditions analyzed. Moreover, the mechanisms for dispute resolution will need to involve lawyers, litigation and arbitrations in courts and adjudication (Gillies, 2004). Other mechanisms include alternative dispute resolution (ADR) and negotiation. For work performed under contract, the innocent party is entitled for compensation by defaulter to a sufficient sum to put them into the original position and the contract fulfilled by the defaulter. As set out in Hadley v Baxendale (1854) 9 Exch 341, the alternative is available to the innocent that claim quantum meruit (what it deserves) for work done and follows the normal contractual principles for damages (Grace & Fenwick, 2010). Therefore, the innocent party gets entitlement to damages for compensation and end to the contract if there is serious breach. 2.0 KEY RISKS IN OUTSOURCING WORK TO SUPPLIERS 2.1 Overview The aim of this section was to evaluate the key risks that firms outsourcing work to suppliers face. It examined the risk evaluation tools, project partnerships, contract forms, contracting options, project methodologies and monitoring or closure of projects. 2.2 Supply chain risk management Businesses take a level of risk as they engage capital and other resources to make profit. In the risk spectrum, organizations can range from being risk averse to risk takers. Most organizations are risk averse and would want to conduct adequate feasibility studies before engaging in international ventures (Rosettenstein & Brady, 2013). Risks have a lot of damage to organization such as losing competitive advantage, increase in costs, and creation of bad press, supply disruption and loss of market (Waters, 2007). To evaluate some of the risks of outsourcing work to suppliers, a risk table and a risk assessment matrix is developed as essential risk assessment tool in supply chain risk management. 2.3 Risk assessment matrix The risk assessment matrix provides the impact and probability of risk occurrence that affect the outsourcing of work to suppliers. The risk matrix is as shown in the table below. Figure 2: Risk assessment matrix From the table above, the risks have two components; probability or chance of occurrence and impact or consequence. The areas appearing in GREEN have low risk occurrence and impact while YELLOW has medium impact and occurrence. However, the RED color indicates high frequency of occurrence and has the highest negative impact to the organization. Based on the table above, the risks are then identified and assessed for their frequency of occurrence, impact on the organization, and mitigation measures for the risks. The risk register is shown in the table below (P: Probability; I: Impact; RS: RS: Risk Score). Table 2: Risk register for outsourcing work to suppliers ID Risk description Impact description P I RS (P*I) Ownership Risk action 1 Outsourcing a broken function Inadequate communication of supplier requirements 5 8 40 Procurement manager Fix the process before being outsourced 2 Insufficient understanding of savings, value improvements and total cost structure Conflict by parties on financial goals and outsourced functions. Renders the agreement invalid 8 8 64 Operations managers Define total function costs and report to both parties 3 Service level misunderstanding Affects the long-term relationship with the supplier 4 8 32 Customer service manager Build interim checkpoint into the agreement or run parallel operations for some time 4 Poor deployment of strategic sourcing process Difficulty in leveraging the methodology and supplier selection process 8 10 80 CEO Engage the strategic teams of both parties 5 Ineffective contract management Frustrates the terms of contract and lead to financial losses 10 8 80 Procurement and legal officer Observe the procurement process from design, negotiation, management, control and execution 6 Non-performance of upfront risk assessment Bad outsourcing decision will be made 4 8 32 Operations manager Conduct and document risk assessment before and after choosing the supplier From the table above, risks have been identified and assessed for frequency of occurrence and impact. The risk score of 80 and 64 are the highest and require the top level management to action the risks. The lower risk scores can be auctioned by functional managers. In outsourcing work to suppliers, it is important to assess and manage outsourced project risks (Rosettenstein & Brady, 2013). One of the models is the risk management model. This is because operations in supplies and procurement are continually being evaluated with regard to objectives and goals initially set. (Source: O’Keeffe & Vanlandingham, 2005, p. 10) Figure 3: Risk management model for outsourcing From the model above, risk management strategies are then put in place and suitable control mechanisms are observed. For example, it is critical to manage supplier selection risks such as identifying the best suppliers, requesting quotations or proposals and then developing a fair evaluation of proposals. Risks can be mitigated, avoided, transferred or accepted. In the case where the supplier fails to perform the contract, it is important to mitigate by having an alternative supplier who can be reached in case of emergency. It is also important to transfer risk to suppliers by insuring work and goods supplied for third parties. 2.4 Outsourcing contracting and negotiation risks Negotiation and outsource contracting should leverage on information and documentation during analysis and relate to outsourcing process. First, the service or product being outsourced should be described, supply market analysis conducted as well as business impact and procurement risk analysis. Sourcing strategy need to be documented and the Request For Proposal (RFP) process recorded (O’Keeffe & Vanlandingham, 2005). Second, bids or proposal received should be analyzed to determine how suppliers will be brought to the negotiation table. The contract must satisfy requirements such as quality, time and price. In the outsourcing lifecycle, an outsourcing risk management framework is used during the outsourcing lifecycle as shown in the figure below. (Source: O’Keeffe & Vanlandingham, 2005, p. 12) Figure 4: Outsource risk management framework The project management tasks need to be based on sourcing strategic and over organizational strategy. Minimizing the project failure will require the team to employ risk management and proven outsourcing methodology (O’Keeffe & Vanlandingham, 2005). The team should comprise all functions and considers analytical, process and technical skills. A contract and negotiation plan is advisable to mitigate the contract management risk of all agreements including exceptions, responsibilities and roles, transitional requirements, product specifications, escalation procedures and service levels agreements. Supplier performance risks and management of outsourced contract affects supplier compliance and performance, assignment of supplier and company roles, and the establishment of performance controls and loop feedback (O’Keeffe & Vanlandingham, 2005). The risks with outsourced team should be mitigated by; 1. Reporting matrices and defining procedures 2. Meeting calendars and schedules 3. Execute responsibilities and roles for all parties 4. Document in detail Management forums and controls should be set up and implement to manage and address outsourcing performance risks such as resolution of performance, internal and external customers, personnel and third-party provider issues (Hallikas et al. 2004). Moreover, there is need to tackle forecasting and demand plans and the contingency and joint proactive crisis prevention. Implementation of the control of supplier risks requires the use of project methodologies such as Gantt charts and project responsibility charting. A Gantt chart will help in actioning the risks and providing timeframes for completion. The Gantt chart for outsourcing of work to suppliers is as shown below. Figure 5: Gantt chart for actioning supplier risks The Gantt chart above provides planning and scheduling process on the implementation of outsourcing risks. Execution of risks will help in planning for new initiatives, bills and payments, reviewing major changes and recommending changes (Blecker & Kersten, 2006). On the other hand, monitoring, closure and control of outsourcing risks will require five key stages; commit to invest, commit to construct, available for use, end of defect liability period and end of project lifetime. Planning and design of outsourcing risks commits some investment and while build phase allows the parties to use the risks (Rosettenstein & Brady, 2013). Defects liability period shows the end of risk liability after the action strategies. The parties to the supply contract at the end of the project risk lifetime marks the end of the contract life. 3.0 RECOMMENDATIONS This section proposes key clauses that need to be included in the contracts so as to achieve value for money. The proposed clauses are listed below. All procurement of work, services and goods contracts must be based on value for money with due regard to regularity and propriety. The clause should define the boundaries on the contract including delivery schedule, payment terms and details of price A clause stating that until the supplier is fully paid for, they maintain their right of ownership if services and goods A clause stating the statutory rights of the purchaser that limits the contractual liability of the seller A clause shifting the legal responsibility to the supplier for any problems, exonerates the purchaser and covers after sale service A clause in the contract that compels the suppliers to replace a whole batch or individual faulty goods if there is a problem with the services and goods A clause in the contract that stipulates or defines penalties for failure to meet quality standards or delivery times A clause that defines the exit procedures or dispute resolution to be followed if either party wants to end the contract or is dissatisfied with the relationship A clause showing intellectual property and ownership of assets, means of measuring performance and mechanism for payment reduction if the level of service is not met A clause that considers all the benefits and costs of the contract such as overheads in managing the contract, unit costs, set up costs, and fixed and recurrent costs Reference list Blecker, T. & Kersten, W. (2006). Managing Risks in Supply Chains: How to Build Reliable Collaboration in Logistics, Erich Schmidt Verlag. Connor, J.M. (2010). Price-Fixing Overcharges 2nd Edition, Purdue University. http://emmanuelcombe.org/connor.pdf. Gillies, P. (2004). Business Law: Remedies for breach of contract, Federation Press. Grace, T. & Fenwick, A. (2010). The termination of contracts for Breach, London. http://www.feg.com.au/documents/TerminationpaperTRG10.10.pdf. Hallikas, J., Karkonen, I., Pulkkinen, U., Virolainen, V.M. & Tuominen, M. (2004). Risk management processes in supplier networks, International Journal of Production Economics, 90(1): 47-58. https://law.resource.org/pub/us/case/reporter/US/497/497.US.199.88-2109.html O’Keeffe, P. & Vanlandingham, S. (2005). Managing the risks of outsourcing: A survey of the current practices and their effectiveness, APICS, Independent Risk Consulting. Mallett, N. (2012). Contractual remedies: the different outcomes of rescission and repudiatory breach, Lewis Silkin Press. Marcar, N. (2015). What qualifies as fraud? When is it ‘sharp but legal’? Social housing. http://www.socialhousing.co.uk/what-qualifies-as-fraud-when-is-it-sharp-but- legal/7007980.article. McKendrick, E. (2009). Contract Law, 8th edn, Palgrave. Prickett, F. (2013). Terminating a contract, Clayton UTZ. http://www.claytonutz.com/publications/news/201305/01/terminating_contracts.page. Rosettenstein, G. & Brady, S. (2013). Supplier risk management: Time to take control, Price Waterhouse Coopers. Schaps, K. & Chestney, N. (2015). Accused of overcharging, UK energy firms could face price cap, Reuters, July 7, 2015. http://uk.reuters.com/article/2015/07/07/uk- britain-energy-competition-idUKKCN0PH0G620150707. The National Archives, (2014). Supply of Goods and Services Act 1982, UK Government. http://www.legislation.gov.uk/ukpga/1982/29. Waters, C.D. (2007). Supply Chain Risk Management: Vulnerability and Resilience in Logistics, Kogan Page Publishers. Read More