Flexible Contracting

Trend Definition 

What is the essence of this trend? What is its impact? 

• Essence: Flexible contracting emphasises an adaptable buyer-supplier agreement that can be dynamically tailored to the current supply chain needs and requirements
• Impact: These contracts are essential to foster adaptability and resilience along the supply chain to mitigate the risks of the dynamic environment

Trend Drivers 

Why is this trend emerging now? What’s changing? 

• Awareness of Major Disruptions: Especially during Covid, companies witnessed a strong increase in demand while others saw a steep decrease, resulting in the contracts not being able to cater to the buyer's needs
• Equitable Partnership: Since the outcome is decisive for the fulfilment of a contract, both parties need an incentive to collaborate in order to reach the goal in the most efficient way
• Shared Risk for Stability: Supply chain complexity demands shared-risk strategies that incorporate stability, effectively addressing vulnerabilities within this intricate network

Use Cases 

How to apply this trend? 

• Flexibility as Part of the Contract: Evaluating suppliers based on flexibility
  Example: Micron Technology, a US company, evaluates its suppliers also based on their flexibility, thereby aiming to provide procurement teams with a high degree of adaptability
• Flexible Contracts as Part of the BCP: Have production plans for unforeseen events
  Example: Johnson & Johnson included production plans for sudden events in their business continuity planning and ensured that their supply network was able to fulfil the changing demands in case an event occurred

Procurement Relevance & Response Strategies 

How should Procurement adapt its Processes, Organisation, and Strategy?

• Adapt Contract and Monitoring Structure: Implement dynamic contract terms to adjust quantities and pricing based on market fluctuations and disruptive events that need to be constantly monitored and predicted
• Supplier Identification: Identify suppliers that are capable of quickly adapting to new scenarios