5 Tips to Write Supply Chain Contracts for Diverse Suppliers
Supply chains that take advantage of diverse suppliers are often cited as being more agile, resilient, innovative, and sustainable. They are credited for promoting consumer trust and driving competition. But there are many barriers to implementing programs that encourage diversity in supply chains, including reliance on traditional supply chain contracts.
To reduce barriers for diverse suppliers, your company should reflect on its supply chain contracts and eliminate terms that create or perpetuate hardships for those suppliers. Here are five tips to help your business promote diversity through its supply chain contracts:
1. Use plain and inclusive language in your supply contracts to make them more accessible.
Plain language means using words, phrases and sentence structures that are easy for your audience to understand. It doesn’t require you make your contracts any less sophisticated. Rather, it makes the contracts simpler to read for business purposes and can speed up the process of getting to a signed agreement. Therefore, you should consider who is likely to be reading your contracts and draft them using language that would be familiar to and comfortable for that audience.
Generally speaking, it is useful to do the following:
- Specifically define key terms.
- Use the simplest words and phrasing consistently. Don’t complicate the contract by using gratuitous acronyms.
- Remove unnecessary words from your contracts.
- Avoid exceptions to exceptions and double negatives, wherever possible.
- Use examples where phrasing may be unclear.
The plain language you rely on should also be inclusive. The Linguistic Society of America (LSA) defines inclusive language as being language that “acknowledges diversity, conveys respect to all people, is sensitive to differences, and promotes equal opportunities”.
The best way to achieve inclusive language is to seek feedback from relevant stakeholders. Ask your in-house diversity team or a diversity consultant to review your contracts before you start negotiations with diverse suppliers.
2. Make a practice of having shorter payment timelines for diverse suppliers.
Given that minority-owned and female-owned businesses are among the fastest growing segments of the U.S. economy, accessing these emerging suppliers offers exciting possibilities to buyers and recipients. The emergence of these diverse suppliers is driving innovation and competition, which places downward pressure on supplier costs and inspires new or improved products or services. Yet, diverse suppliers often face significant hardship if their cash flows are held up by long payment terms.
You should reflect upon the payment terms in your supplier contracts and work with your diverse suppliers to develop terms that benefit both parties. Consider upfront payments, partial or installment payment plans, and payment terms of 30 calendar days or less.
These shorter payment timelines can be supplemented with provision for “open discussions” that promote resolution of any disputes about payment amount, due date or other payment terms within 30 days before pursuing legal dispute resolution avenues.
3. Assess whether boilerplate insurance provisions are appropriate for diverse suppliers.
Boilerplate provisions relating to insurance often don’t reflect the real legal risk suppliers pose to the buyer/recipient. In practice, these insurance clauses may ask diverse suppliers to purchase insurance that isn’t appropriate for the circumstances. This is a financial burden that some diverse suppliers may not have the means to take on.
To promote diverse supplier participation, you should place any insurance provisions that your company includes “as standard” under a microscope. Assess whether your standard insurance requirements reflect the actual risk the supplier poses to your business. Then, work with your insurance provider(s) and diverse supplier(s) to determine whether there are alternatives to these boilerplate requirements that work for all stakeholders.
4. Mutual feedback is essential for maintaining relationships with diverse suppliers and it should be provided for in your contracts.
There is often a power imbalance (perceived or actual) that encourages suppliers to stay silent on issues, barriers or inefficiencies. By encouraging communication and feedback, whether it’s positive or negative, you promote growth and development of the relationship between you and your diverse suppliers. Importantly, you also open doors for increased efficiencies and reduced costs.
The contract between your company and your diverse suppliers should provide for the routine provision of feedback about operations and supplier capacity. You can determine how regularly to engage in feedback based on the supplier’s unique needs and challenges.
When you receive any feedback or if your supplier is facing issues in meeting its contractual obligations, you should work proactively with your suppliers to resolve issues or find alternatives. For instance, you may be able to split the contract between two or more suppliers to address capacity issues.
Finally, you should rely on legal measures like rescinding or litigating the contract as a last resort.
5. Your supply contracts should outline your company’s commitment to diversity within supply chains.
Businesses are increasingly adopting public-facing open procurement plans. These plans can be supplemented by the inclusion of provisions that outline your company’s commitment to including diverse suppliers within its supply chain in its supply chain contracts. The provisions demonstrate to your diverse suppliers that diversity is a priority for your business, while also letting the suppliers know what is expected of them.
Your business can contractually require suppliers to demonstrate a mutual commitment to your business goals. They might include:
- Requiring diverse suppliers to achieve relevant diversity certifications
- Mandating minimum wages for workers (like Google started doing in 2020)
- Employing a minimum number/percentage of underrepresented workers
- Subcontracting to diverse suppliers
When in doubt, rely on humanity in your supply chain contracts.
Developing supply chain diversity requires a multifaceted approach that addresses complex systemic issues. By creating contracts that prioritize humanity and empathy in business while still focusing on business outcomes, you can gradually reduce or eliminate some of the barriers that hinder supply chain diversity.