Tag: contracts

Good OM Reading: Options as an Outsourcing Contract Ends

We discuss the important topic of outsourcing in detail in Chapter 2. But what happens when an outsourcing contract is nearing its end? The buyer faces a strategic decision: extend the contract in its current form, divide it between the incumbent and more parties, or terminate it. “The decision should not be hastily made, or the solution may be worse than the problem,” writes KPMG in its new report, Extend, Divide or Terminate . Here are the 3 options:

1.Extend and renegotiate the contract with the current service provider: If criteria such as end user satisfaction and service level agreements are being met, the existing agreement with the service provider may be extended. A contract extension can take 2 forms. If the buyer is fully content with the provider’s performance, or if it is looking to buy time, extending the contract under the current terms is a reasonable choice. If amendments are called for to help ensure that the new agreement is fit for purpose going forward, the changes should be renegotiated.

2. Divide the contract: A buyer may also make the decision to transfer part of the responsibilities to one or more alternative service providers. This may be because the current service provider has failed to deliver particular services to the client’s satisfaction, the provider has decided to remove certain services from its portfolio, or the client’s requirements have changed to such an extent that a provider with a different area of specialization is required. When a contract is divided, it is possible that the client will bring elements of the outsourced services back in-house.

3. Terminate the contract: Sometimes one or both parties will decide to end the relationship. In such a situation, the services are transferred to a new service provider or back to the buyer organization itself. To help ensure a smooth transition, a complete exit strategy should be developed and the transition guided by experienced internal staff or an external advisor.

OM in the News: GM Turns to Long-Term Supplier Contracts

An auto worker assembles an SUV chassis at the Arlington, Texas, GM plant
An auto worker assembles an SUV chassis at the Arlington, Texas, GM plant

General Motors’ purchasing chief said the nation’s largest auto maker aims to sign new parts contracts for two vehicle generations, or as long as a decade, to cut costs and gain access to advanced technologies. GM is gearing up for big investments in luxury cars, electric vehicles and other projects, and expects to sign hundreds of billions of dollars in new supply contracts over the next 2 years. By locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker expects suppliers to share more innovations and better processes that help save money. “We want them to double down on us,” the purchasing head stated.

Recently, GM asked about 30 of the auto maker’s biggest parts makers to help relieve supply bottlenecks so the company can crank up production of its highly profitable pickup trucks and sport-utility vehicles. In some cases, GM promised to help suppliers cover additional costs to get the needed parts.

“The change is part of a technology arms race in the industry, with auto makers vying to be first with self-driving features for vehicles or propulsion technologies that reduce emissions,” writes The Wall Street Journal (April 15, 2015). GM’s CEO recently implemented a strategy aimed at improving relationships with suppliers; she believed that the auto maker was overly optimistic in its planning assumptions or too forceful in its cost-cutting mandates. The firm is attempting to undo decades of damage caused by poor relationships with suppliers that had curtailed its early access to new innovations.

Classroom discussion questions:

1. Describe GM’s prior relations with suppliers.

2. Why the change?

3. Research the history of the famous GM VP-Purchasing, Jose Lopez. (See Supply Chain Digest (July 7, 2009)