The Importance of Strategic Agreements for Supply Chain

Management

Name: Aws Juma’a 1620112

Production & Operational Management

Dr. Mohammad Al-Awamleh

Introduction:

This paper will start by defining supply chain management process, and then will move

on to define strategic contract and how they are different from standard contracts then it

will list the benefits of such contracts and finally will conclude how they are beneficial

for supply chain management.

Supply chain management (SCM):

SCM includes all activities required for a product flow, from planning and controlling to

executing, it involves everything related to the production, starting from acquisition of

raw material and making sure to acquire the best quality with the lowest cost, to

production process which needs to be done in the most efficient and cost-effective way,

to the process of distribution to the final customer and in some cases it could also

involves after-sale services.

An efficient supply chain management will make sure that everything within this process

is being executed in the most streamlined and cost-effective way possible, this means a

full integration in the planning and execution of all processes required to produce and

distribute the product and a full share of information within different departments in order

to optimize the flow of material, information and financial capital in the areas that

broadly include demand planning and inventory management. In order to insure this,

managementsoften use specialized software programs to enhance the efficiency of the

process in order to achieve a competitive advantage.

Strategic contracting:

Making contractsand building business relationship have become an essential part of

today’s business both in the public and private sectors. The process of preparing and

launching contract management in an organization is not seen as a one-step project, it is

rather an ongoing multi-step project that could take years to be successfully achieved.

Unlike what it might seem to be, standard contract does not mean short nor simple

contracts, in fact most standard contract tend to be exactly the opposite, standard referees

to those type of contracts in which it is a straightforward agreement which states that each

party agrees to completely fulfill their contractual obligation in exchange that the other

party will from their side fulfill their duty, which for example could simply mean for one

part to provide raw materials and for the other part it would mean to pay the financial

compensation. However,with today’s extraordinary growth of business and the

extremecompetition init,this is no longer enough to achieve competitive advantage,

companies are now required to lean toward strategic contracting, unlike the standard

contract, a strategic collaboration is not just a written contract in which each party needs

to fulfill a specific duty, but it also takes this supplier-vendor relationship and transforms

it into a long-lasting, mutually beneficial partnership in which the success of each party is

also beneficial for the other party’s business (Taylor, 2007).

Benefits of strategic contracts

as stated, such long lasting contracts are beneficial for both parties and below are some of

those benefits

1.Enhancing resources and sharing knowledge

perhaps this is one of the most important benefits of the strategic collaboration, as

Strategic alliances are agreements for cooperation between businesses, with the ultimate

result being a synergy where each party will benefit more from the alliance than from

individual efforts alone, then each party will bring something new for the other party,

each of the will be able to capitalize in the strength of the other party in a way that will

increase their value and benefits, each party will have access for new resources that were

not available for them or were too expensive for them to get before , this share of

knowledge can take place in various ways it could include anything from marketing or

branding skills to management experience to technical expertise, this combination of

resources and knowledge shall raise the value of each partner in a way that would have

been hard and costly to reach for partners if each acts alone, for example contracting with

the right tech company might give a great technical capabilities that were not accessible

before, in respect to production, a strong strategic contract could reduce the cost of raw

material, for example a company that manufacture furniture could benefit from getting in

a long term contract with a lumber company, this will insure a good price and a

continuous supply special in times of high demand (Shum, 2006)

2. Decreasing the Risk

With strategic contracts the two parties’ relationship is no longer seen as a supplier-

vendor relationship but rather as partnership in which each part seeks the benefit of

themselves and their partner for the sake of greater good, this reshape of the relationship

will reduce the risk of any project that the company might think about it helps alleviating

the impact of the risk for example if a company wishes to enter a new venture they will

be in a much greater position knowing that they have a partner in their back, this partner

can also take some of the costs related to the project, in addition to that the combination

of human resources between partners will help generating more innovative ideas related

to the business (Pasternack, 2002)

3. Access to target markets

One of the great benefits of such contracts that it allows the company to easily access

new markets or new segment of an existing one, for instant a company based in the US

could initiate a strategic contract with a company in China, this will create a solid ground

for it to expand their business to east continent, not only they will rely on their partner

existing connections and relationships in the area but also they could use their knowledge

in that market environment, one of the challenges that face companies in new markets is

the legal environment that they are not used to, not all countries have the same business

laws therefore a partner who is familiar with those laws is not such a bad idea, in addition

people behavior is also different in different markets, this is something that should be

taken lightly when organizing marketing campaigns, that’s another thing that a partner

will be most useful with, the collaboration of human resources in such matter will be

highly beneficial and with great value for both companies, because as stated before when
becoming partners the success of each entity means greater value for both (Jonsson,

2013)

4.Reducing cost

By having long contractual relations with vendors a company would gain a great

bargaining leverage over the supplier, this will allow them to demand for lower prices, in

addition the company can reduce cost by obtaining long quantities from their supplier this

is known as the economics of scale which means reducing costs through acquiring huge

amounts of scale, in an industry like airlines, carriers main operating cost is the fuel costs,

unfortunately for them fuel has very volatile prices that change dramatically and is

affected by multiple factors most of them are political, in such industry and in order for

airlines to disperse this risk, they could initiate a long term contract with a fuel supplier

with fixed purchasing price, such hedging will mitigate the risk associated with the

volatile fuel prices (Taggart, 2014).

5. Plan for the Future

Finding the right partner is not easy job, but if done successfully it will mean the

prosperity and growth for the company and for its partners, despites some fears that

strategic contracts and partnerships might end up with mergers or acquisitions, the fact is

both partners can grow successfully as an independent entity and achieve their own vision
and goals in addition to benefiting from the existing long term relationship that they have,

this is mostly seen in startups and middle sized corporations

6. Reduce the numbers of contracting transactions

The contract management process is the interaction between the vendor and the purchaser

that ensures that both parties meettheir respective obligations in any procurement

relationship. This is not an easy job, finding the right vendors to sign with is a distressing

and costly process, the process usually includes searching for many options and possible

vendors, getting a sample of their stock , getting competitive bid prices and getting the

best quality with the best price possible, not to mention having to keep up with the vendor

on a daily basis and engage in a periodical assessment that evaluate their work and

making sure that the contracts are adhered to and the purchasing processes followed.

Having to do this with one vendor is time consuming and costly not to mention having to

do it with multiple vendors, by getting in a strategic contract the company will reduce the

cost of transaction and with time less assessment will be conducted to that specific

vendor as they will become trusted (Meng, 2013)

Conclusion:

Supply chain management process involves all activities related to the production of the

product to the delivery to the end user, SCM organizes all related activities and insures

that they are all integrated and have a mutual goal and deliver the best product possible in

an efficient and cost-effective way.

Engaging in strategic contract enhances each step of SCM process as it reduces the costs,

gives the company greater bargaining power, enhance the efficiency production and

enhance contracting management, through reshaping the relationships with suppliers and

transforming it into partnerships, this would give partners more opportunities and open

doors for more innovative and fresh ideas which overall would enhance the company’s

operations and contribute in a more successful business.

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