Terminating Supplier Relationships - how to deliver a positive outcome

Considering termination

Strong supplier relationships are essential to deliver value and drive innovation, however, not all partnerships are destined to succeed.

When a supplier poses a material risk to your business through consistent underperforming or failing to meet their obligations, a business naturally turns to the potential termination of the contract.

Ending a supplier relationship is a sensitive process that must be handled with professionalism, tact, brand awareness and strategic foresight - yet so many terminations still go horribly wrong and at worse end up in a litigious situation.

So how can we manage supplier terminations effectively without exposing the business to more risk?

Before thinking about termination, it is critical to understand why the relationship is failing.

What is the issue related to – is it quality, delivery, communication, compliance, cost? Has the supplier been given ample opportunity to improve?

Many terminations go wrong at this stage - if the supplier does not understand that you feel they are not meeting their obligations, they cannot remedy the situation. Having all the relevant data about the obligations, the pattern of failure(s), as well as the contract terms governing dispute resolution and termination, means the decision to terminate has been well structured, considered and can be justified and well-documented.

Contract Management and Supplier Relationship Management

In the majority of cases, effective communication can address the underlying issues without having to take the drastic action of terminating the contract. Engaging in Supplier Relationship Management (SRM) where performance is regularly reviewed and issues raised, documented and mitigation put in place not only demonstrates professionalism but provides the supplier the opportunity to resolve the issues being experienced. If the supplier is unresponsive or the situation irreparable, this dialogue can also serve as a prelude to the actual termination event.

Any Procurement or Contract Manager should be familiar with the contract and its clauses but when considering termination, it is essential to re-read the relevant clauses and any additional clauses providing context to termination. This will give you further information on any provisions regarding breach, non-performance, notice periods, penalties for early termination and so on. This helps form the exit plan giving you time to put alternative supply arrangements in place and also protects the organisation from any legal or financial consequences of terminating.

Transition

Termination is not just about removing a poorly performing supplier. It needs to be viewed in the context of securing delivery as well. Forming a clear transition plan will help avoid any unnecessary disruptions and minimise or remove damage to internal credibility. The transition plan needs to identify alternative suppliers, how to approach the market and securing continuity of supply. You do not need to end the supplier relationship on bad terms and if the supplier (reluctantly) agrees with the reasoning, they may also be supportive in the transition period in the hope to win your favour again in future.

Termination

Once all the due diligence has been completed and all necessary steps taken, a formal decision to terminate can be agreed and documented. This should be clear, concise and professional, referring to the contract and giving reasons for the termination. The decision also needs to be communicated early internally to affected stakeholders, especially with the teams who interact with the supplier with clear alternative supply options shared and agreed.

Lessons Learned

After the relationship has ended, it is important to look back and understand how and why that situation occurred. Could this situation have been prevented in any way? What more could the organisation have done to ensure that the contract and supplier were successful? These insights can be used to strengthen future supplier selection, onboarding and performance management processes.

Terminating a supplier is not an easy decision to make and it is not an easy process to follow, but it is one that is sometimes absolutely necessary to protect the interests of the organisation. By approaching the situation with professionalism, transparency and strategic planning, disruption can be minimised and value can be created through an improved supply, outcomes and enhanced internal relationships.

Termination of a contract is not a business failure – it is a continuous improvement step towards building a stronger more resilient supplier base and demonstrating the value of Procurement.

Reach out to 7 Steps Solutions to discuss subjects such as; cost savings, value creation, supplier relationship management, contract management and category management.

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If you are interested how your business can create P&L impactful savings, read our short blog Commercial thinking Procurement – is your function creating enough P&L value?