Suppliers being squeezed with short term contracts

Long-term contracts with suppliers are increasingly being terminated as tight economies and competition force Europe’s largest companies to renegotiate contracts every six months, according to a recent survey from procurement management software company Ariba. The survey of 100 big company procurement directors late last year found that contracts are renegotiated much more frequently than before, but that quality of service, not price, is the main driver. Key findings: 81% of European organisations are renegotiating on a six-monthly basis rather than every three to five years, as earlier; 73% say they are basing selection on supplier quality performance; personal relationships remain important, but only 13% factor them in. No longer simply buyers, procurement directors now say they are required to assess service levels of suppliers as well as prices, apparently pushing the recent clutch of supplier performance management systems higher up the agenda. Currently, the survey finds only 65% of big European companies with formal supplier performance programmes and systmes. With effective management of supplier performance, procurement departments can achieve much better visibility into the quality of service being provided, observes Steve Muddiman, vice president for EMEA marketing at Ariba. He insists that measuring supplier performance against company objectives has to be the way to go, pointing out that, armed with that information, they can make rational decisions with proper assessment of service levels.