In today’s world, embarking on the procurement journey can often feel like navigating a complex maze. But framework agreements will go a long way in enabling organisations to navigate the complexities of procurement with ease.
They are becoming an indispensable tool which results in improved mission readiness and responsiveness to the demands of the supply chain, especially for work that is more mental than manual.
The heightened attention of the need for agility has also led to renewed attention on framework agreements.
Given the highly volatile business environment obtaining across the industry divide, these agreements are flexible enough to promote agility and speed of execution on the fly.
They will facilitate the easy adaption of changes in the current business environment where technological changes, regulatory requirements, changing customer demands and or market conditions change without warning. Where procurement professionals treat framework agreements as a staple in their supply chain networks, half of their agility challenges will be solved. Framework agreements are therefore best known for balancing flexibility with specificity.
Framework agreements are tailormade in such a way that clauses in the agreements are tailor made to address the unique aspects of long term agility during the currency of their existence. The forward thinking approach is crucial for building a successful and adaptable competence framework that is geared towards solving challenges peculiar to each industry.
They ensure that the agreement remains relevant and beneficial to both parties. They provide a modular structure that allows for incremental adjustments and scalability in line with requirements of the day.
The beauty of framework agreement structures emanates from the fact that they are characterised by a blend of adaptability and a heightened sense of agility. Supply chain professionals can adjust the scope of work, they can adjust quantities as and when necessary, they can vary the specification of their goods and or services, depending on the needs of the hour.
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The flexibility and agility provided by framework agreements will accommodate the incorporation of price adjustment clauses that give both parties sufficient time to respond to changes as and when required.
Framework agreements are a plus to procuring entities in that they can be used to leverage the negotiating power of the company by consolidating procurement requirements over a specified period of time. They are strategic supply chain tools that benefit both suppliers and buyers through economies of scale. They will help to consolidate otherwise disparate purchases, meaning those using framework agreements can benefit from volume consolidation of procurement requirements.
Economies of scale may prompt suppliers to offer more competitive prices due to their potential to produce at scale. By committing to a certain volume of purchases, organisations can negotiate better prices based on bulk discounts leading to significant cost savings.
Framework agreements will make it easy for suppliers to plan their production and shipping schedules effectively in order to meet requirements for larger volume contracts since supply agreements are established well ahead of time.
Implicit in a framework agreement is the intention of creating long-term relationships with preferred suppliers. They will help to establish clear roles, responsibilities and approval processes.
Both parties will be obligated to adhere to set rules and regulations. This will reduce the threat of potential legal challenges and attendant penalties in the event of breach. With predefined terms and conditions, organisations are guaranteed the supply of quality goods or services, reducing the risk of substandard procurement.
Framework agreements will promote transparency in business transactions since the terms and conditions are agreed upon in advance prior to implementation.
The legal foundations of these agreements are critical as they ensure clarity, fairness and enforceability. Each party will understand the scope of work, pricing, terms and conditions that will govern future contracts.
At the heart of these agreed terms and conditions is the need to establish trusting business relationships with suppliers and being very clear on procurement’s expectations through voluntary disclosures. It ensures that all parties have a mutual understanding of what is expected, reducing the potential for unnecessary disputes.
Framework agreements will often set basic trading parameters upfront. By so doing, they will free procurement from the burden of redundant repeat negotiations. By setting clear terms and conditions for future transactions, they enable better predictability and minimise the risk of misunderstandings at the time of call-offs.
A comprehensive understanding of the potential pitfalls and challenges that may arise at contract execution makes it possible for vendors to act proactively and avoid unnecessary delivery failures.
The use and reliance on framework agreements is not just about the legal scaffolding, “it’s about creating a dynamic, responsive, and resilient foundation that can support the complex tapestry of modern business relationships.
It provides assurance on the contractual terms dispensing with claims around battle of the forms which normally poses a lot of headaches in fixed contracts. Such legal frameworks will promote the spirit of mutual trust and common values, winning both the hearts and minds of both parties to the transaction. This will significantly promote long-term business relationships built on shared values.
Like all good things in life, framework agreements have got their dark side. They can create as many problems as they try to solve.
It is common knowledge that they do not in any way offer a form of guarantee of any work or future orders to any supplier or contractor that is shortlisted under this arrangement.
Framework agreements provide contracting authorities with a facility for procurement without creating an obligation either to purchase exclusively from a single supplier or to purchase a minimum quantity of products. It must therefore be noted that even if a supplier is shortlisted on a framework agreement, they may not be awarded a call-off contract at all during the currency of the framework agreement.
Yes, they indeed set the groundwork for the future award of contracts but certainly without guaranteeing any volume or spend. It therefore implies that winning a place on the framework agreement does not necessarily result in getting any future business.
Quantities and delivery schedules are not definable or determinable at the beginning. Framework agreements are therefore, for most part, non committal in terms of volume of future business. It is not an iron clad guarantee for future business. Bidders will invest time, effort and costs to be placed on a framework and then potentially not receive any work through them. They can therefore be regarded as fishing licences to empty lakes. They can waste suppliers’ valuable time and effort.
The other con of framework agreements relates to their potential to prevent and stymy competition. For instance, a three-year sole supplier framework agreement may create a monopoly position. Suppliers who fail to pass the mark at the selection stage will be locked out of any call-offs for the duration of the agreement.
In between, there could be other innovation related improvements that could happen during the currency of the agreement and procuring entities will miss the opportunity to exploit the novel ideas. There may be new suppliers or new solutions within the market that were not included when the agreement was initially set up.
The other downside of framework agreements is that they are only useful for predictable purchases. They are less useful for the sourcing of goods and or services which are not really predictable, implying that they may end up attracting less than ideal suppliers.
Framework agreements may be of little value for highly complex purchases shrouded in volatility and uncertainty. The other downside of framework agreements is that those suppliers or consultants who regard themselves as best-in-class may not bother to participate in the framework agreement tender process.
Those suppliers from the “big tent” may choose to ignore the invitation to participate in a framework fully aware that should you require their goods and or services, you will be forced to look for them, especially where they are aware that there is no competition. In such a scenario, supply chain professionals will be forced to select the best of the worst that would have volunteered to participate.
As a corollary of the above, where a framework agreement is established with a sole supplier, it may create a monopolistic position which ultimately leads to overreliance on a single entity with its attendant challenges.
In certain supply chain cycles, concern about the efficacy of framework agreements runs deep leading to their ugly side. In a world where increasing corporate attention to socially responsible practices is regarded as a way of life, such agreements can be a source of corruption especially where there is a single supplier arrangement.
An environment where a single supplier continues to be the sole supplier of essential requirements on a continuous basis may lead to the creation of an unholy alliance between supply chain professionals and unscrupulous suppliers. The procurement world is sometimes mired with such corrupt scandals that have shaken up the profession.
In a monopoly position, there will be no second opinion with regards to prices, delivery terms and payment terms which can result in connivance between procurement personnel and suppliers leading to the payment of above market prices.
Related to the above, where there is an unholy alliance between procurement and suppliers, it can result in poor workmanship, delivery of poor quality goods and general non-performance issues which can be swept under the carpet.
Apart from corruption, there is a high likelihood of complacency on the part of monopoly suppliers. Their performance gets poor in a sea of familiarity. Long term relationships may lead to reduced performance over time. It may reduce the quality of service when the same vendors are repeatedly used.
Framework agreements can suffer from decreased transparency and competition, becoming closed systems, shutting out new competent suppliers.
In conclusion, supply chain professionals acknowledge that in a VUCA world, supply chain professionals are fully aware that the price of standing steel watching bad things unfold is steep. In a world of constant evolution, stagnation equals irrelevance.
The pressure cooker environment is not going away anytime soon. The world stage is constantly changing.
Although supply chain professionals will probably view continuous volatility as a stretch, they are required to adjust and adapt gracefully as and when they encounter such challenges.
Nothing will erase the volatility of the unknown, but tools of trade such as framework agreements may reduce the pain of the sting. This concept will work best where supply chain professionals promote the pros while avoiding the cons.
- Nyika is a supply chain practitioner based in Harare. —[email protected].
