How to Deal with Late Delivery from Suppliers?

Late deliveries can be the reason behind the failure of a business. Such delays can create interruptions in the development/manufacturing process, which results in delayed delivery to customers and, thus, decrease the overall brand reputation of your business.

Causes for such delays can vary depending upon the type of items being procured, the complexity and capabilities of the supply chain, and several other factors like economic fluctuations.

This article covers the key aspects that a manufacturer can handle in order to manage the issue of late deliveries from suppliers. The weak variables of the business usually affected by delayed deliveries are the loose internal processes, reactive approach, improper vendor management, and lack of apt communication. The following four ways can be used to turnaround these weak variables:

• Creating strong and seamless internal processes.
• Being ‘proactive’ and not ‘reactive’.
• Setting up a robust vendor management/vendor accountability process.
• Enabling better and smooth communication.

Let us dive a bit deeper into these methods.

Creating a Strong & Seamless Internal Process

A robust internal process can only be formed through cooperation between the different offices of the business’ front office. The foundation for successful cooperation lies in the fusion of clearly defined roles and real-time data systems.

Clearly defined roles include significant key performance indicators (KPIs) with pre-determined expectations. For example, all new orders for a day must be entered into the system by the end of the day (EOD) and all late work orders must be rescheduled in the system by EOD. These are some good examples to show how failing to execute the most basic steps aptly and timely can stress out the entire process.

• Real-time data systems help the team focus on performing the necessary tasks rather than spending time to figure out what needs to be done. This difference in approach is guaranteed to be beneficial. You are sure to observe incredible improvement in terms of efficiency when different teams only work on the required tasks and their status is analyzed in real-time.

It is quite easy to spot delivery issues in clear-cut production processes before they can have any significant impact on the business.

Be ‘Proactive’ Rather than Being ‘Reactive’

A ‘reactive’ approach towards the procurement process often results in spotting the issues too late, which makes it even harder to tackle the issue. On the other hand, a ‘proactive’ approach helps manufacturers achieve the flexibility needed to deal with just-in-time deliveries through efforts like preemptive component auditing and purchase order (PO) validation.

Having an accurate and efficient design for assembly (DOA) in place shall also provide significant help in finding inconsistencies in new product designs before the production process begins.

Robust Vendor Management/Vendor Accountability Process

To tackle late deliveries, manufacturers must implement an infrastructure that records PO items and holds vendors accountable for delays. Key metrics record the number of late deliveries and the total number of push/pull/cancel messages from the material requirements planning (MRP) system.

Most companies tediously maintain the PO status and do not trust the MRP system as much. As a result, the teams of these companies must discuss all deficiencies face-to-face. Besides, the need to frequently organize meetings to discuss deficiencies, the length of such meetings and the need to have such meetings are key indicators of a poor process. On the other hand, a robust and efficient PO tracking system, which is updated in real-time, makes the data more trustworthy and enables the team to act on the issue right away rather than wasting time questioning it.

Better & Smooth Conversation

It is imperative for all parties involved to have a smooth communication channel to ensure that the requirements and delivery dates are clear for the supplier. You must clarify all queries related to the dates you need deliveries on.

Legal Remedies

Parties involved in a supply of goods contract must include all the relevant provisions that would help them address and deal with potential losses caused by delays.

Contractual Indemnities

A buyer of goods must add exclusive contractual indemnities to cover potential losses caused due to late delivery or non-delivery of goods. While the buyer might not face any loss themselves, their customers might, which shall thereafter lead them to ask the buyer for compensation.

As per the usual standards, the supplier is not liable for any third-party claims suffered by the buyer. Buyers cannot recover such claims from the suppliers. This is quite unfair considering the supplier is at fault here (for late delivery), but the buyer must suffer. It is strongly advised to include an indemnity clause covering the buyer against such losses.

Similarly, the supplier may choose to include an indemnity clause that covers them against losses incurred by them due to the buyer’s inability to take deliveries on time. This may especially be the case when the goods being supplied are perishable and cannot be easily sold anywhere else.

Liquidated Damages

In the case of delayed deliveries, the buyer may have a claim against the supplier for breach of contract. However, considering how tedious and time consuming it can be to practically establish the actual loss caused by the delay, not many buyers choose to go down this road. Though adding a ‘liquidated damages’ clause could be the ideal solution to help buyers deal with such situations.

The ‘liquidated damages’ clause addresses a certain type of breach and states a specific amount that must be paid in case of such a breach.

• One of the biggest advantages of a liquidated damages clause is the absence of the need to prove that you have suffered a loss while making a claim. In addition, the claim does not rely on the interpretation of the clauses and excludes some heads of liability like lost profits, lost business or lost opportunities.

It must be noted, however, that the fixed amount must be determined keeping a genuine estimate of the potential loss that can occur. If not, and the amount is unreasonably high, the liquidated damages clause may not be valid. Also, considering a liquidated damages clause addresses a specific type of breach, it may be the only viable solution, even if the actual loss suffered is greater than the amount mentioned under the clause. You must be careful and pay extra attention when drafting a liquidated damages clause for such situations.

Liquidated damages are not ideal for major breaches but prove to be a good method to deal with minor breaches in supply contracts. As the compensation is decided upon by both parties mutually, it allows them both to maintain a healthy commercial relationship even if either party underperforms.

Termination

Terminating any supply agreement is usually the last resort as it also ends the commercial relationship between the parties involved. The usual terms of sale are a one-time deal and do not include exclusive provisions for termination, considering there is no significant need for it. However, in the case of long-term supply agreements, exclusive termination guidelines that grant the right to terminate the contract or declare insolvency of a party should be included.

Note: A question raised commonly related to such agreements is whether a delayed delivery will be enough as a contractual breach for the buyer to terminate the supply agreement. Usually, only ‘material’ and ‘consistent’ breaches result in the aggrieved party terminating a contract.

If the timing of deliveries is a crucial factor and the buyer wishes to terminate the contract if faced with a delay, an exclusive mention of the time of delivery being ‘of utmost importance’ must be stated in the agreement.

It should be kept in mind that in the case of perishable goods, it would be implied that the time of delivery shall be of utmost importance. However, this is not an established law and therefore, should not be something the buyer blindly relies on. In case there is an exclusive mention of the time of delivery to be of utmost importance and a delay occurs, the buyer shall be entitled to terminate the agreement and claim for damages against the supplier.

Suppliers usually try to avoid having such a provision in the contract and, thus, more refined supply agreements exclusively state that the time of delivery shall not be of utmost importance.

Even if the contract does not address this issue and a delay occurs, the buyer can still make time of utmost importance by sending a written notification to the supplier stating that they must deliver the goods before a reasonable deadline. It should also state that failing to do so may entitle the buyer to terminate the supply agreement. By issuing such a notification, the buyer can make time of delivery of utmost importance and thereafter invoke the remedies mentioned in the contract. This can be used to apply some pressure on the supplier. However, it is quite a harsh method that is most likely to end commercial relationship between the two parties.

Minimum Purchase Obligations

Long-term supply agreements usually dictate the minimum supply/purchase quantities. Certain remedies that can be used to deal with the shortcomings of both parties must be included in the agreement.

Suppliers may add a right to claim the purchase price in case of any shortfalls in the quantities bought by the buyer. Besides, the supplier may agree to take shortfalls into account while adjusting the price for the subsequent year.
On the other hand, when the supplier fails to timely deliver the goods, the buyer will have to purchase the same from a third-party at a much higher price.

• As such, the buyer will insist on adding an exclusive clause that gives them the right to claim the additional expenses from the supplier in the agreement.
• The clause may also include that the quantity of goods purchased from the third-party shall count against the annual purchase requirements stated under the supply agreement.

A key aspect often neglected in this context is the importance of accurate forecasting provisions. Although these are not mentioned in the agreement as a binding factor, the regular forecasts act as an early warning system.

In case the buyer’s/supplier’s ability to receive/supply the required amount of goods is disturbed due to some unexpected events, such forecasts can help prepare for the same beforehand. This allows both parties to have a discussion to resolve the issues or adjust the contract as per mutual agreement.

Conclusion

There are certain legal aspects that you must incorporate into supply contracts to ensure issues are resolved in the best way possible. However, you must also create a robust internal process, be more proactive, install a vendor management system, and have smooth communication with suppliers to avoid such issues. Besides, even if there is some issue due to delay in delivery, you must take the best approach and try to save the commercial relationship between the two parties.