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Surviving Supply Chain Integration: Strategies for Small Manufacturers
want to look ahead, anticipate potential problems or hazards, and find ways to relieve these conditions by providing for them in the contract (or, more generally, in the overall supply chain relationship).
High levels of supply chain integration are more likely to be achieved with "win/win" contract approaches than with win-lose approaches. A long-term view is important for integrated supply chains in which the parties have a substantial bilateral stake in the relationship and contractual breakdowns can be costly. The typical intent of a partnership is to establish a relationship with increasing interdependency that will outlive the term of the contract. A farsighted view, although it may be difficult to implement, can increase benefits for all parties.
Contract as a Framework
Contracts consisting of rules and contracts that serve as an operating framework for a relationship are very different. Lawyers and accountants often relate to the former, whereas business is more often conducted in the spirit of the latter. Contracts that serve as frameworks for relationships are based on four key ideas: (1) the objective of the contract is to serve the goals and desires of the parties, rather than those of the lawyers; (2) contracts that attempt to define complex relationships are unavoidably incomplete; (3) give and take by all parties is necessary to work through gaps, errors, and unanticipated situations; and (4) informal and formal features of the contract and of the organization are all part of the exercise. This is not to say that the letter of the contract is unimportant. If, despite their best efforts, the parties are unable to work through a contractual impasse, the contract can be useful for purposes of ultimate appeal.
There is every reason, therefore, for contracts to be written and negotiated carefully, although this does not mean being legalistic. Because providing for every possible contingency is impossible, information disclosure and adaptive mechanisms must be included to assist the parties when difficulties arise and the formal terms of the contract take on added importance. Contracts are legal documents, after all, and relationships should be defined precisely in case the contract becomes the ultimate reference for resolving disputes. Mainly, however, contracts should be thought of as frameworks to aid the parties in realizing their collective purposes and mutual gains.
Neither party, especially not an SME, can unilaterally decide that a framework is the correct approach to define a supply chain relationship. Both parties must subscribe to the concept for it to be successful. If one party adopts a myopic, legalistic view and the other views the contract as a framework, both parties will be frustrated. It is important, therefore, that they agree on the nature of the relationship and recognize that each