The contracts and service level agreements (SLAs) that have been entered into between the small business and its suppliers provide a framework for the relationship between the parties. The contract outlines the products or services to be provided, for how long, under what terms and conditions, and the assumptions on which the contract is based.
An SLA is a type of contract which focuses only on performance metrics and service quality; hence both contracts and SLAs are legally binding. Small business owners can have both types of agreement with their suppliers – one advantage is that the SLA can be revised without having to revise the contract. At a minimum, small business owners should ensure that the signed contract or SLA adequately and clearly reflects the obligations of the parties, incentives and penalties, and dispute resolution processes.
The complexity of the contract or SLA will depend on factors such as the value of goods or services being supplied, and whether there are sub-contractors involved. Once an agreement has been entered into, small business owners should actively monitor and enforce it and not simply trust the supplier to do the right thing. Key performance indicators (KPIs) are essential to this, and should ideally already be included in the contract or SLA.
KPIs that small business owners can monitor on a daily, weekly or monthly basis include:
- Timeliness of delivery
- The number of returns or do-overs due to defects
- Supplier responsiveness to emergencies, complaints and general queries
In selecting relevant and important KPIs, small business owners should understand how supplier behavior and performance impacts operations and resist pressure from suppliers to take into account peripheral and immaterial KPIs. Regular meetings and discussions can then be held with suppliers to review performance against the KPIs, discuss what is or are not working well (and why), and the remedial actions to be taken.
Two-way communication is key - small business owners need to find ways to confront and overcome linguistic, cultural, technological and other barriers to communicating effectively with their suppliers. Supplier contract management also involves small business owners having systems in place to manage the paperwork associated with contracts and SLAs. Well-organized electronic or manual filing systems make it easy to retrieve documentation which can be used in discussions with suppliers (e.g. extending contracts, adding annexures), and in legal disputes.
Small business owners should also be in a position to keep track of key contract events and milestones which may otherwise be forgotten if the contract is not reviewed periodically. Ignorance of these events and milestones can leave the business vulnerable to penalties and legal action, or to be taken advantage of by suppliers.