Introduction
Supply chain management is a critical aspect of business that hugely influences organizations’ success. The transformation of an idea for an end product is complicated and involves numerous moving parts. As a result, how a company manages this critical process has a huge impact on the revenues that the company will amass. Farooque et al. (2019) defined supply chain management as overseeing how products and services morph from ideas to raw materials and a finished end-product for consumer consumption. The supply chain management process includes operational aspects such as purchasing, logistics, sourcing products, information technology, and manufacturing. The supply chain management system incorporates consumers, wholesalers, manufacturing facilities, retailers, and suppliers into a seamless operation structure. In addition, contracts are essential requisites for the supply chain process. Contracts are essential as they align or integrate the interest of different parties in the supply chain into that of an organization. As such, supply chains contain different contracts with suppliers to ensure that all parties help a company achieve its goals and objectives. Therefore, this report will focus on evaluating and analyzing a company’s supply chain, the different contracts the company utilizes with its suppliers, and the benefits and drawbacks associated with the contracts. In addition, the paper will contain an analysis of the problems that arise, the performance measures and controls, the terms and conditions, and the supply chain considerations put in place.
The retail sector has undergone significant changes in the last decade. Baily et al. (2021) asserted that most retail companies today ship products directly to consumers, a strategy with many risks such as consumer dissatisfaction or theft, which can have serious repercussions on a company. Companies are responsible for ensuring that their supply chains are effective and that the suppliers develop a collaborative relationship. Baily et al. (2021) affirm that organizations should invest in performance metrics, reporting strategies, and KPIs to help manage and monitor suppliers. In the past, most supply chain systems mainly focused on moving products from suppliers to manufacturing facilities, distribution centers, and retail stores. Current consumer demands have shifted the responsibilities, and the way supply chain systems operate. Today, the leading retail stores around the globe have efficient supply chains that are synchronized, responsive and fast. Retail stores strive to satisfy consumer needs in terms of convenience as consumers prefer using home delivery, click and collect, mobile devices, local pick-up services, and the internet to purchase and receive products. As such, it is essential to adopt efficient supply chains that will satisfy consumer preferences regarding convenience, quality, and customer satisfaction.
Companies in the fast-food industry are some of the global companies with efficient, synchronized, fast, and highly responsive supply chains. These companies source raw materials from different suppliers in different regions of the world and ensure that their customers get fast and convenient services. For instance, a consumer can shop for food products virtually or via mobile phones and receive the same products via home delivery services within acceptable time frames. One company from this retail industry utilizes vertical integration. This supply chain is efficient as it helps companies reduce their operating costs and increase their profits. A company grows its raw materials using contracted producers in a vertically integrated supply chain. They also transport the raw materials using the company and own lands or buildings where the business premises are located. As such, they control most of the supply chain, thus reducing costs associated with sourcing, processing, transporting to distribution centers, and finally delivering to various retailers.
Types of Contracts
The company has numerous suppliers for different products in their company. Since it is a global company, suppliers are located all over the globe, especially in Asia and South America, due to the high availability of raw materials and labor. First, the company in some countries in Asia does not use contracts with some of its suppliers. The company prefers to enter long-term partnerships that do not involve drawing any written contract. In other companies, the company uses cost-sharing contracts with some of its supplies on certain raw materials, especially those that are expensive. The company also uses the fixed price with escalation, cost sharing, and fixed price with incentives. The contracts have been instrumental for the company in managing positive relationships with some of its suppliers in different countries.
Cost-Sharing Contract
Cost-sharing contracts allow costs to be shared between the supplier and the purchaser on a specified percentage. This type of contract is essential for companies as it motivates suppliers and purchasers to avoid incurring extra costs. According to Wang et al. (2017), cost-sharing occurs in two different methods: the united and divided cost-sharing structures. The advantages of this structure are that suppliers and purchasers are responsible for the disruption caused to self-failure under the divided-cost sharing. However, both parties share costs that arise from joint disruption of the supply system. In addition, under the united sharing structure, the supplier and purchaser are jointly responsible for costs incurred during a disruption. On the other hand, this contract benefits the company as supply chain reliability can be enhanced without huge investment increments, especially with the divided cost-sharing structure (Wang et al., 2017). In addition, the contract motivates the suppliers to prevent any disruption in the supply chain as they will be held accountable.
Fixed-price with escalation
Monczka et al. (2015) asserted that the prices would increase when a supplier supplies a product in the long term. As such, the supplier and purchaser entered the escalation clause in the initial contract leading to a fixed-price escalation contract. The escalation clause enables the increase or decrease of the cost based on the circumstances in the market. In this type of contract, the supplier enjoys a higher level of price protection while the supplier is exposed to potential price reductions in the future (Monczka et al., 2015).
Fixed-price with incentives
Suppliers and purchasers share costs and savings in the fixed price with incentive contracts. Monczka et al. (2015) stated that in this type of contract, suppliers should prove that they can achieve actual cost savings by utilizing efficiency in production or substituting raw materials. In turn, the costs saved from these efficiencies and initial set prices are shared at a set rate.
Fixed-price contracts are effective as they provide buyers and sellers with predictable scenarios. In case of price changes, the purchaser will benefit when the prices in the market increase, while they still benefit when the price of material drops. On the flipside, fixed-price contracts come with higher prices. The purchaser in this type of contract gets absolute certainty on future prices of products. On the other hand, the seller may negotiate higher prices than they normally charge to caution them about the higher risk they are taking. The contract is rigid as both the seller and buyer cannot change it since it is binding unless they collectively decide to draw a new contract which is costly and time-intensive. Clear communication is necessary for fixed-price contracts to ensure that operations run seamlessly. If either party overlooks a detail or information, it may disrupt the whole supply chain process.
Long-term partnerships with no contracts
This type of contract is not like the traditional or other contemporary contracts. The purchaser and seller in this contract enter into a partnership through an oral agreement. The binding factors in this type of partnership are trust and confidence in the parties involved. The contract is essential as it enhances relationships with suppliers as they develop the feeling of being valued and trusted. This type of contract motivates the sellers as they feel valued and trusted to handle business. The partnership approach also commits and binds suppliers to the sellers. If the company fails, the seller will. The relationship assures the company of a constant supply of materials. As a result, sellers are encouraged to work efficiently, fast, and effectively. However, the contract has several drawbacks that could be detrimental to a company. The supplier may lose the motivation to enhance their performance or thus affect the buyer’s performance and operations (Monczka et al., 2015). Long-term partnerships risk making unreasonable demands leading to higher costs and unfavorable terms not included in the initial agreement (Monczka et al., 2015). In addition, the seller and buyer can change the terms as they deem fit since there are no legally binding contracts to prevent them from making changes. This aspect can be a high risk for both the seller and buyer. The main challenge with this type of contract is enforcing it.
Buyers and sellers have no rules governing operations since no written contracts specify any terms or conditions. McDonald’s is an example of a company that uses this method of no contracts but verbal agreements. Instead, the company prefers using handshakes to make and seal supplier partnerships. Vitasek et al. (2012) asserted that the reputation of a business in the modern business environment is a critical success determining factor. Businesses in the modern day primarily depend on being ethical, dependable, and truthful, which takes a significant time to build. Businesses must build constructive ethical programs that will ensure the business’s success even in the future. This strategy has been extremely successful for McDonald’s over the years. The company hopes to extend the feelings of being valued and dependable with its suppliers.
Performance Measurement and Control
Performance measurement is vital as it helps in evaluating the efficiency and effectiveness of a supply chain system. Performance measurement helps organizations measure the supply chain’s level of contribution to a company’s financial and competitive performance. The process helps organizations make better decisions and provide performance feedback on areas of improvement. This process is essential in directing behavior towards results and motivating relevant parties (Monczka et al., 2015). This fast-food company has a rigorous performance measurement and control system. First, the company conducts supplier assessments to gauge its performance before making critical decisions. The company has a code and standards that require that all suppliers are evaluated to ensure that the company achieves higher performance concerning the environment, management systems, health, safety, and labor. The assessments are conducted through thorough site visits, interviews in the native language with the management and employees on the supplier side, and document auditing. The company also uses external auditors to evaluate different areas of the supply chain and identify areas that need improvements. Performance control is a significant step in supply chain management. Control allows organizations to maintain quality standards at all levels of supply chain management. The company has several control practices with its employees to ensure that suppliers always uphold quality standards. The company has auditors that visit supplier cities regularly to evaluate the process and operations to ensure they comply with organizational and international standards. Quality Assurance officers also conduct impromptu site visits to ascertain that the suppliers and processing facilities always maintain the highest quality standards. Suppliers who are unable or refuse to comply with the standards are always removed from the supply chain system. The results are then communicated to the suppliers, who are then given a platform to correct issues when found problems. Moreover, the company takes a proactive approach to working effectively with the suppliers in the corrective action process, especially in labor, management, safety, and operations.
Some of the problems that may arise in the performance are the inconsistencies that may arise in the labor laws in the countries. Most countries in Asia and South America have been in the spotlight due to poor working conditions, child labor, and exploitative labor. Labor practices in Asian countries have faced harsh criticism, particularly because the communities are impoverished and poor (Robertson., 2016). Some of the practices include low wages, discrimination, physical and verbal abuse, suppression of labor unions, child labor, and frequent occurrences of disasters such as death in the workplace. For example, in 2013, the collapse of the Rana Plaza in Bangladesh is one of the many instances portraying poor labor practices. The disaster led to the death of more than 1100 individuals, while 2000 sustained serious lifetime injuries. These countries have also faced problems such as fires in workplaces which are very serious concerns for the safety and health of the employees. Baily et al. (2021) argued that retailers today are under sharp scrutiny of their supply chain systems. Even though most of the problems occur at the bottom level of the chain, the retailers, in most cases, must take responsibility for the issues and problems that occur in their supply chain systems. In the sustainability segment in retail, labor unions, human rights, wages, and factors safety are of utmost concern. The company faces a problem mostly concerning poor work conditions, lack of trade unions, poor wages, and extremely long work hours (Baily et al., 2021). These aspects of business affect the motivation of employees and could adversely affect a company’s financial and competitive performance. Companies must ensure that their suppliers have fair labor practices and that the employees are also represented under trade unions.
Terms and Conditions
Terms and conditions should be a priority in any supply chain system. Terms and conditions are vital in cushioning a company against any legal lawsuits should problems arise in the future. Most of the legal problems in a supply chain system revolve around the policy of the sale of goods. Most countries in the United States follow the Uniform Commercial Code (UCC), which provides governing regulations under which products are purchased and sold unless relevant parties agree to different terms. Terms and conditions revolve around factors such as quantity and product of products, the situations under which the prices and quantity of the products are subject to change, associated risks, intellectual property rights, warranty, liability limitations, attorney charges, and jurisdiction, among others. When parties fail to state their terms and conditions succinctly, their rights may be violated since they are unclear, leading to conflicts.
The company has a highly detailed terms and conditions document that binds them as buyers and its suppliers. Some of the important clauses in the terms and conditions section included defining terms. This section is essential to provide accurate definitions of the terms in the document to ensure they are clear and the relevant parties will completely understand the information and terms. The document also contains a confidentiality clause that prohibits the disclosure of confidential information of the company. The document’s terms and conditions accurately describe and identify the kind of confidential information and the repercussions to suppliers if the information is disclosed to a third party. The document’s terms and conditions also list the obligations and standards the supplier should adhere to. They meet the requirements of the buyer. Most importantly, the document also contains critical information on payments, any changes that may need to be made, suspension of performance and termination of the purchase, and products and services to be delivered, among others.
Since most of its suppliers are in Asia and South America, the company has made several considerations within its terms and conditions document. First, communication can be a huge problem hindering the complete comprehension of the document for most suppliers in these countries. In addition, some of their cultural practices can also affect the terms and conditions documented. One of the significant challenges in global sourcing involves cultural differences that arise during business (Monczka et al., 2015). Culture refers to the language, values, beliefs, customs, religion, education, and social institutions that define an individual. Behavior and values are critical ways that culture can affect business. Values refer to shared beliefs or norms that are internalized, thus affecting the thought processes of individuals (Monczka et al., 2015). On the other hand, behavior revolves around attitudes and values that affect people’s actions (Monczka et al., 2015). For instance, contracts and negotiations are carried out differently in the United States, Europe, and Asia. Thus, a company should consider these considerations to ensure that terms and conditions are favorable to all parties. For instance, people from Indonesia and Thailand have the habit of saying yes frequently as a sign of politeness or showing that they are listening. As such, a person from the United States may assume that the yes meant agreement when they did not agree to any conditions. Thus, companies should be given time to review the document at their own pace before signing or agreeing to a contract. In addition, the terms and conditions document should be made available in the native language to reduce any chances of the language barrier.
Supply Chain Considerations
The vertical integration supply chain adopted by the fast-food company is applicable and can be adopted on a large-scale basis. First, the system allows a company to reduce operating costs by owning some supply segments and entering partnerships with most suppliers. For instance, when a company owns its distribution and warehouse systems, it cuts costs on distribution and storage charges. In addition, a company can also increase efficiency in the delivery of products as they can easily control the distribution channels. Partnerships and owning parts of the supply chain system allow a company to manage the quality and performance standards effectively it wishes to achieve concerning its products. McDonald’s is a company that has successfully integrated itself into all stages of the supply chain system, which is a cost-effective strategy. On the other hand, long-term partnerships with no contracts should not be adopted, especially on a long-term and global scale. This type of contract will be hard to monitor or hold suppliers accountable when they disrupt the supply chain system. The most appropriate contracts include fixed-price contracts and cost-sharing contracts.
Conclusion
Supply chains are effective strategies to ensure companies manage their resources and seamlessly integrate their production process. Retail industries should strive to adopt effective supply chain strategies to ensure that they meet the needs and preferences of their consumers. This means that companies can deliberate and choose effective contracts that will be easy to monitor and enforce with the suppliers. Retail companies should also ensure that the suppliers comply with international labor requirements to eliminate the chances of affecting the company’s competitive and financial performance. The UK fashion retail company can adopt some of the contracts and performance measures to ensure that they can reduce their costs, meet their customer needs, and at the same time remain profitable.
Works Cited
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