Contracts are entered into to define the rights and obligations of parties.
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Demanding your rights and executing your obligations results in the performance of the contract.
Most projects fail to see the light of day because the contract manager sleeps on duty and ignores the contract delivery risks.
Failure to deliver in contracts has implications to both parties. The contractor loses revenue if the contract manager is tightly monitoring delivery schedules.
There are cases where payments are made before execution, in such cases advance payment guarantees are required.
If the contractor fails to deliver, there is high risk that the client may invoke the liquidation of the advance payment guarantee.
This impacts negatively on the reputation and financial position of the supplier.
In supply contracts, failure to deliver impacts directly on the procuring organisation’s value chain.
The company will fail to meet production schedules in the case of manufacturing organisations.
The ripple effect is that the organisation will fail to satisfy customer orders and impacts negatively on the revenues and profitability of the organisation.
The same is true for procurement for resale, customers will not bother to shop from a grocery shop that has an inconsistent stocking policy.
There are many factors that cause delay in delivery. Production plant breakdowns are the major cause of delayed delivery.
Where the production is on time, there may be a challenge with respect to logistical arrangements.
Goods may be lost in transit, resulting in the customer failing to receive the delivery as expected.
In some cases, delivery trucks may break down, leading to delays in delivery. There are also risks associated with breakages during delivery and offloading of goods.
This then calls for employment of effective strategies to minimise the risk associated with delayed delivery.
If the organisation considers that the products ordered have a high risk of loss due to damages in transit or at the point of offloading, the strategy would be to employ proactive measures such as designing appropriate packaging at the time the specifications are prepared.
This would include the inclusion of specific instructions on handling on the packages.
Another measure would include a provision in the contract that deliveries would only be accepted after an inspection and the type of inspection required would be dependent on the risk involved.
Loss and damages are inevitable in a normal environment. It is, therefore, necessary to minimise the risk by taking appropriate insurance cover.
It is, therefore, important that parties agree on who is responsible for the insurance. This calls for a thorough understanding of international commercial terms (incoterms) that detail when the risk of a delivery shifts from the buyer to the supplier.
Understanding incoterms helps in understanding what the organisation has paid for. A price has associated costs that need to be understood.
Some prices are of the shelf price, requiring the buyer to arrange packaging, transport, transit insurance and offloading. Some prices include the associated costs.
This is where the notion of “cheap is not always cheap” comes from. It is important to understand the total costs instead of relying on the understanding of the price offered alone.
The reason for holding stock is to provide insurance, just in case there is demand and supply fluctuations. Supply fluctuations are caused by issues discussed above.
It is, therefore, important that an appropriate stocking policy is put in place to minimise risks associated with delayed deliveries, taking into consideration that holding stock on its own is an expense and risk to the organisation.
Procurement personnel need to sharpen their contract management skills in order to effectively manage the risk associated.
Contract management may give rise to liability disputes that can be very costly. Petty issues such as management of losses, damages and delays of goods in transit need to be effectively managed if an organisation is going to be competitive.
Procurement staff need to work hand in glove with finance personnel to ensure that deserving suppliers that perform are paid on time since some delays in delivery are associated with poor paying clients that force suppliers to hold back delivery. – Newsday
Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: email@example.com Skype: nyasha.chizu