Purchasing & Supply Management: Contracting (Part 1: Functions and elements)

Summary

This lecture, led by Finn Winstram from Rotterdam School of Management, delves into the fundamental processes and elements of contracting in purchasing and supply management. It explores key stages such as pre-contractual, contractual, and post-contractual phases, alongside different types of contracts, governance modes, and contract functions from various perspectives. The lecture highlights the variety of buyer-supplier relationships, from in-house arrangements to market transactions, and emphasizes the importance of clear contract elements and legal frameworks. Practical considerations and sectoral differences in contract use are also discussed, providing valuable insights into contracting practices in supply management.

Takeaways

• 😀 Contracting is a crucial process in purchasing and supply management (PSM), forming part of the sourcing phase of the PSM wheel.
• 😀 The contracting process includes three main stages: pre-contractual (specifications and tendering), contractual (negotiation and signing), and post-contractual (implementation and claims handling).
• 😀 Contract management is often a strategic or tactical activity where buyers ensure suppliers comply with the original terms of the contract.
• 😀 A contract can be seen either from a legal perspective, as an enforceable agreement, or from a broader perspective, focusing on the obligation to perform or refrain from performing certain actions.
• 😀 The three main types of governance modes for contracts are in-house suppliers, market transactions (spot market), and bilateral contracting (long-term supplier relationships).
• 😀 Bilateral contracting situations involve customized agreements between buyer and supplier, contrasting with anonymous, standardized contracts in markets like commodity exchanges.
• 😀 Transaction cost economics views contracts as tools to protect investments in specific assets that cannot be redeployed, ensuring fair returns for both parties.
• 😀 Governance through contracts allocates decision rights and responsibilities, such as contract renewal and applicable national law.
• 😀 Agency theory emphasizes using contracts to align incentives between buyer and supplier, ensuring both parties have shared goals and performance expectations.
• 😀 Contracts can also serve as a means of information provision and coordination, helping suppliers perform their tasks more effectively by setting clear goals and expectations.
• 😀 Contract elements can vary based on the product or service being purchased but generally include terms on price, delivery, and risk management. Some contracts may be split into multiple documents, like purchase orders, framework agreements, or memoranda of understanding.
• 😀 The importance and structure of contracts differ by country, legal system, and sector. For example, in the U.S., strict adherence to the written contract is required, while in agricultural markets, informal agreements might hold significant value.

Q & A

What is the main focus of this lecture on contracting?

The main focus of this lecture is on contracting, particularly within purchasing and supply management (PSM). It covers the functions, elements, and stages of contracting, using the PSM wheel as a reference framework.

What are the three stages of contracting as defined by Baylor?

Baylor defines three stages of contracting: the pre-contractual stage (determining needs and tendering), the contractual stage (contract negotiation and signing), and the post-contractual stage (project execution and claims handling).

How is contract management viewed in relation to the PSM wheel?

Contract management is linked to the 'implementation' part of the PSM wheel, which includes supplier relationship management and performance management, focusing on assessing supplier compliance with the original contract.

What is the difference between the two definitions of a contract mentioned in the lecture?

The first definition, by Atia, views contracts as mutual agreements enforceable in court, while the second definition takes a broader perspective, seeing contracts as obligations to perform or refrain from certain actions, encompassing more informal agreements in business practices.

What are the three main sourcing situations or governance modes discussed in the lecture?

The three main sourcing situations are in-house supply (within an organization’s hierarchy), the market (spot markets with highly standardized products), and bilateral contracting (customized agreements between buyer and supplier).

What does transaction cost economics emphasize in relation to contracts?

Transaction cost economics sees contracts as tools to safeguard investments, particularly in transaction-specific assets, such as machines or human resources specialized for one particular buyer.

What role do contracts play in governance according to the lecture?

Contracts play a role in governance by allocating decision rights, such as contract renewal and applicable national laws, to the respective contracting parties.

How does agency theory view contracts?

Agency theory views contracts as mechanisms to align incentives between parties, ensuring behaviors such as compliance with instructions and rewarding desired outcomes.

What is the purpose of contracts from an information provision and coordination perspective?

From an information provision and coordination perspective, contracts are used to set goals and provide information to suppliers, enabling them to perform their activities effectively and efficiently.

What elements are typically found in a purchasing contract?

Typical elements of a purchasing contract include specifications, payment terms, delivery terms (such as Incoterms), and dispute resolution procedures. The exact content may vary based on the product or service being purchased.