Dealing with Supplier Underperformance

It isn't always possible to predict which vendors will let you down. Some vendors display suspicious behaviour from the start of your relationship. When they fail to meet their obligations, it might seem obvious in retrospect and you may wonder why you signed a contract with them in the first place.

Alternatively, you made the decision to deal with a couple of untrustworthy vendors because the state of the market simply didn't leave you any other choice. You had hoped that things would turn out for the better, but now you realise that your suspicions regarding those vendors weren't quite so unfounded.

Possibly any other procurement manager in your position would have made the same decision. In some cases, there are unforeseen circumstances and a vendor is forced to underperform. If you've fallen into any one of these situations, it isn't worth developing a cynical attitude with regards to vendors and their promises.

Now is the time to take action and take corrective steps. The simple truth is that a vendor has underperformed and in the process made your life difficult. What are you going to do about it?

In this article, we will consider some of the ways you can deal with vendor underperformance. The goal is also to improve your supplier performance management strategy so that you can prevent any of these problems from reoccurring in future. Which means that you will be ready to correct vendor underperformance before it causes operational problems in your organisation.

In basic terms, poor supplier performance can be addressed on three different levels, depending on the circumstances and severity of the underperformance:

1. Taking corrective action in an attempt to get the vendor relationship back on track.
2. Making changes to the vendor contract to force the vendor to correct their ways.
3. Cancelling the vendor contract altogether—or refusing to honour the existing agreement.

We will now consider each one of these approaches in turn.

Solution 1: Taking corrective action

With this approach, you assess the situation as it stands and develop corrective steps to get the vendor relationship back on track.

You will have to implement this type of action more often than you might think. This is because you have to develop a culture in your organisation where every instance that a vendor underperforms is addressed.

Every time a vendor does something unacceptable or underperforms, you have to take corrective action— regardless of how serious the breach is or what effect it may or may not have on your business. If a mistake can be ascribed to the action or inaction of a vendor, you have to take the appropriate action to deal with the issue.

Because if you don't correct a vendor's misbehaviour, they might misconstrue your actions as tacit approval for their conduct. It will give them the consent to continue to behave in the undesirable fashion through the duration of the contract.

When you don't address breaches of agreement, it can easily lead to a steady decline in service and quality. Vendors will start to make promises that they know they won't keep, knowing full well that you will never take them to task for their underperformance.

So what type of corrective action should you take? Firstly, try to ascertain if the vendor is able to fix the situation. If it’s within their power to take corrective measures on their side that will facilitate a solution, you should discuss these corrective measures with them. Work out exactly what the vendor is going to do to correct the issue. Agree on a timeframe for the solution to be implemented.

Make sure to discuss the divisions of responsibilities. Who is responsible for taking action, in what time frame, and what are they going to do? In this way you can both address the current problem and discuss ways in which similar problems can be prevented in future.

If after discussion with the vendor it becomes clear that neither the vendor nor your organisation is at fault for the supplier underperformance, you need to follow a different approach.

Firstly, determine whether the contract makes provision for such a occurance and follow the remedies prescribed by your agreement. If that's not the case, discuss ways that the both of you can work together to address the root cause of the problem. Consider the external factors responsible for the breach, and workshop a solution.

If you want that these external factors can be resolved by the vendor, you might consider offering assistance to the vendor to resolve the matter. If it's at all feasible, you could, for example, give the vendor advance payment to resolve any cash flow problems that might prevent them from resolving the issue. Another option is to negotiate extending delivery dates.

The most important thing is that the issue is resolved as soon as possible and your business operations get back on track.

Solution 2: Changing the vendor contract

If the corrective action on the part of the vendor is significant enough, it may be necessary to update the terms of the vendor contract. In this way, you will be able to make formal changes to your business arrangements and to the vendor's behaviours.

Some problems can be fixed with solutions that are quick and easy to implement at a low cost. Oftentimes this isn't the case—which means that someone has to take responsibility for effecting the change. There might also be extensive cost involved. The vendor might also be required to provide a much higher level of service in the future to prevent this problem from recurring.

Any of these changes will have very real legal ramifications, which means that the terms and obligations of the contract need to be revised to reflect the changes.

Formalise systematic changes to your agreement by making amendments to the contract. This requires all the necessary parties to be notified and informed of the changes. You don't want anyone to claim ignorance to the changes after the fact.

After a change in contract is signed, it will be necessary to track the vendor's performance more closely than usual—at least for the next couple of reporting cycles.

You have to ensure that the revisions to the contract have the desired effect of lifting the vendor's performance to acceptable levels. You also have to check that the changes to your agreement didn't have any unforeseen, undesirable consequences.

Solution 3: Cancelling the vendor contract

When things have regressed to such a level that there are no realistic, practical remedies available to correct vendor underperformance, it comes time to terminate your agreement. Or at the very least, you can refuse to make use of your existing contract.

At this point, it became clear to everyone involved that it's impossible to address the vendor's poor performance. Or the root cause of the problem is unassailable.

Another possibility is that the vendor has proven intransigent in dealing with the problem, have persisted in displaying abject indifference to your objections, resisted making a change, or were reluctant to give in to your demands, or were just unwilling to honour the terms of your original agreement.

This is a clear indicator that you have to terminate their agreement.

It may take a while for you to realise that the vendor is unable or unwilling to deal with their underperformance problem. This will compound the problem and make a resolution to the issue even less likely.

When it becomes apparent that the vendor isn't bringing their part to address the underlying issue, you have to initiate urgent discussion with them. You need to point out to them that you require immediate action on their part. Stress the consequences of their continued intransigence as it might raise the stakes sufficiently to kick them into action.

When these negotiations fail to achieve the desired result, it might be time to  terminate the contract before it has run out. This might be a good option for your organisation if alternative vendors are readily available to make up the slack in supply.

In some cases, the vendor agreement stipulates specific time periods where the contract may be terminated—for example, on the anniversary of the start of the contract are after a minimum period of operation.

Some contracts also include penalties should one of the parties decide to cancel the contract early. In some cases these fees can be considerable, which provides added impetus to try to resolve the matter in a more amicable fashion.

But you might be left with no other choice if the consequences of terminating the contract are less severe than continuing with the current arrangement and enduring the vendor's persistent underperformance.

In some cases, early termination of the contract is neither practical nor possible. It might be possible to just refuse to make use of the contract. But this is only legally possible if the contract doesn't contain a vendor exclusivity clause or doesn't stipulate a minimum spend.

Of course, there should also be other vendors available to pick up the slack and supply the goods you originally sourced from the first vendor. When this happens, you can then peaceably terminate the contract at the end of term. You will be able to sign a new contract with a different vendor once it becomes legally possible to do so.  

When a solution is impossible

There is no guarantee that the measures outlined above will work. It might not even be possible to reach any kind of workable solution to the vendor underperformance problem.

For example, the vendor might not stick to your agreed action steps to correct the problem. Or you might realise down the line that their solution was never practical or possible to begin with. Or the solution you decided upon does not yield the desired results.

In some instances, the root cause of the underperformance might be impossible to solve. For example, the vendor might have suffered the loss of their manufacturing plant through an act of God (wind, fire, flood) or war.

If this happened after you signed a contract, it would be utterly impossible for the vendor to honour their arrangement. If neither party could have foreseen this unhappy result at the start of the contract, the agreement might be subject to the legal principles of impossibility and frustration. This means that one or both parties to the contract may automatically be exempted from fulfilling the terms of the contract.

The result is that your organisation will have to make arrangements to source alternative vendors to deliver the products and services that the original vendors were originally contracted to provide. Depending on the strategic importance of these goods, these arrangements will have to be made with more or less urgency.

Conclusion

It is sometimes possible to control and correct the source of the problem behind a vendor's poor performance—but that isn't always the case.

When there is a breach of agreement, the strength of your vendor relationship will be tested. Depending on how well you were able to forge a partnership with your vendor in the earlier stages of your relationship, the vendor will be more or less willing to work with you to resolve the issue.

To figure out the root cause of the problem, both parties have to be willing to work together. They also have to be open and honest about the true state of affairs.

Both parties have to sit around a table and figure out a solution to the problem that is both practical and workable. You also have to work out a timetable when this plan is going to be implemented.

When the plan is being implemented, its progress has to be carefully monitored. This will also allow you to make adjustments along the way to ensure its success. In this way, both parties can work together to bring vendor performance back to acceptable levels and make the solution permanent.

There are technology solutions to help you with this process. You need a good supplier management solution that will gather and analyse vendor performance along the way, giving you the insight to identify and rectify vendor underperformance.

Such systems become crucial if your organisation is spread out over a wide geographical area or encompasses several divisions—or makes use of disparate supply chains.

In this way, you will have the right support to be able to identify poor supplier performance, diagnose the root cause of the problem, and devise workable solutions to the problem. The system will also support you with actionable information that will point the way to a positive outcome if the vendor underperformance issues prove impossible to resolve.