Long-term contract

Long-term contract means a contract of more than five years in duration. A long-term contract is a
contract to perform work for another over an extended period of time. A long-term contract is also
deemed to be a comprehensive contract since there will never be a need for the parties to revise or
renegotiate the contract as the future unfolds.

(https://definitions.uslegal.com/l/long-term-contract/)

Benefits of long term contracts

1) Reduced costs

In many large contracts the initial set-up costs can be substantial, with deals taking many months to
complete. By concentrating on establishing and developing long term relationships these costs can be
offset, with both parties actively looking to avoid any unnecessary costs which may arise from re-
tendering, re-negotiating or being forced to exit an existing contract early. Better relationships and
increased interaction will lead to less incidents or issues of poor performance, which in turn lead to
lower costs for managing the relationship and reduced costs through failures.

2) Increased efficiency and communication

The longer a supplier provides a customer, the better their understanding of the customers market,
business and business processes will be. This will allow greater integration of business, IT and financial
processes alongside increased effective stakeholder involvement from both parties. As a consequence
the service will improve, becoming more efficient, with “grey areas” disappearing and any issues which
do arise can be handled more effectively.

3) Pricing volatility mitigation

Price volatility is a sensitive issue for many procurement teams. It requires careful weighting of price
volatility against the contract length, volumes and the importance of the procured product (or service)
to the buying organization. For many companies it is vital to establish how much volatility can be
absorbed? Is it better to have a stable, high contract price, or can the organization handle volatility in
exchange for the chance of price drops?

4) Supply Chain Consolidation

As supplier relationships develop, so does the buyers understanding of the suppliers business models,
products and services increases. In return the supplier will develop an increased understanding of the
buyers needs. This allows both parties to look for areas of consolidation across existing products and
services, as well as the potential addition of potential new product and service offerings.

5) Outsourcing

Relationships with trusted suppliers can enable organisations to outsource non critical activities,
allowing buyers to harness specific industry and/or product or service expertise, whilst simultaneously
reducing internal workloads and increasing efficiencies. Examples can include everything from small
business services such as document production to full blown services such as logistics and supply chain
management.
6) Continual Improvement

Long term relationships provide the opportunity for buyers to engage suppliers in a process of continual
improvement of both products and services provided and of the accompanying service levels. This can
be achieved through product development, development of new processes and procedures and through
developing KPI’s and SLA’s over the course of the contract. By taking an active approach to ensuring that
contractual performance is met, buyers can ensure that suppliers continue to improve in the ways which
provide the most substantial improvement to the customer organisation’s products and services.

(https://www.linkedin.com/pulse/top-6-benefits-long-term-supplier-relationships-anne-lafortune-
rabbat)

Involvement of supplier in development

New product development process (Handfield et al. 1999)

As this model is created by Handfield et al. (1999) their stage description has been used to prevent

inconsistencies.

- In stage 1, idea generation, marketers consider the need of a new product, what it has to

do and how much it might cost. Generally, customers are involved to answer these

fundamental questions.

- In stage 2 the company assesses its capabilities and resources to design and produce

the proposed product.

- Stage 3, concept development, the creation is defined, a preliminary prototype model

may be created for that purpose.

- In stage 4, the actual development process, the blueprints and design specifications are

prepared.

- In stage 5 the final prototype can be built and tested. Also in stage 5 all the production

facilities and processes are prepared for the production of the new designed product.

When to involve a supplier

Wynstra and ten Pierick (2000) argue that supplier involvement may range from small design
suggestions to the full responsibility of developing, designing and engineering of a specific part or sub-
assembly. In the automotive industry, for example, suppliers now have responsibility over the complete
dashboard of a car which they completely deliver at the car manufacturer’s production site (Helper and
Levine, 1992).

Supplier involvement can operate at various levels, depending on the amount of design consigned and
information shared. A firm should involve a supplier depending on the complexity and technology of a
specific item or system. (Clark and Fujimoto (1991)

Benefits of Supplier involvement

According to Handfield et al. (1999) several studies have reported that supplier involvement can help to
reduce costs and development time, increase quality and provide innovation to increase market share
(McGinnis and Vallopra, 1998; Ragatz et al., 1997).

(http://arno.uvt.nl/show.cgi?fid=122228)