Question
Select a contract that is used by your organisation.
Assess the contractual terms and their impact on the distribution of power and risk between the supplier and your organisation.
Solution/Answer
Executive Summary
This assessment focuses on evaluating a contract used in procurement and supply in Woolworths Group Limited (WGL). The contract of focus in WGL is the Cleaning Services Agreement. By focusing on this contract, the different contractual terms and their impact on the power distribution and risk between the supplier and the organisation have been established. Through an analysis of both primary and secondary data from the organisation, it has been established that contractual relations primarily govern the dealings of the suppliers in the organisation. This is since a contract is an agreement that is enforceable by the law between two or more persons to abstain from doing some acts or acts. Their intention in this is to create legal relations and not merely to exchange mutual promises. The key areas that have been evaluated and supported by appropriate clauses include price, quality, timeliness of delivery, and ethical risk to establish the risk and power balances. In each of these areas, it has been established whether the buyer or the supplier carries the risk or power. Through a focus on the contractual terms, the area where WGL is accountable for managing end-to-end cleaning services requirements impacts have been evaluated. From the findings of this report, it is evident that this contract is appropriate. The stakeholder’s analysis has also been informed using the Mendelow stakeholders matrix with SWOT analysis noting the different issues and risks presenting the identified challenge in cleaning services delivery and their mitigation by contract terms. From the Kraljic analysis, the contract terms are of strategic importance to WGL, which informs its full leverage on the contract’s risk and power.
Based on the evaluated contract, the recommendations suggested include;
- The evaluated contract needs to include any support offered by WGL, gaps filled, and scope of the flexibility of the terms
- Due to the diversity of stakeholders involved, the contract needs to be more precise and avoid the use of ambiguous or legal jargons for easier understanding
- Since cleaning services touches on all the departments in WGL and subsidiaries, the contractual terms need to be harmonised rather than having different contractual terms for different departments
- The contractual terms also need to capture the laws established by statute (Australian Parliament) to be detailed apart from the Commonwealth workplace laws
Table of Contents
1.1 Organisation Background. 4
2.0 Selected Contract Assessment 4
2.1 Essentials of Contractual Terms. 5
2.2 Strategic Importance of Contract to WGL. 6
2.3 Contractual Terms Importance. 7
3.0 Contractual Terms Impact on Power and Risk Distribution between Suppliers and WGL. 10
3.3 Timeliness of Delivery. 11
3.4 Health and safety Risks. 12
4.0 Conclusions and Recommendations. 13
Appendix 1: Cleaning Services Agreement Contractual Terms. 17
1.0 Introduction
1.1 Organisation Background
Woolworths Group Limited (WGL) is a multinational headquartered in Australia with its active operations ranging from 1924 to its current ranking being the largest retailer in Australia. WGL currently operates more than 3,000 stores dealing with food, drinks, fuel, general merchandise, and restaurants (Woolworths Group, 2020). More than 250,000 individuals are employed by WGL in their different subsidiaries and are involved in serving more than 30 million customers in their different brands every week. To achieve their intended objectives, the organisation partners with immense local farmers and manufacturers. These include and are not limited to Countdown, Dan Murphy, BMS, and Big W. They also partner with different suppliers in a substantial and long-term partnership evidenced by their contractual terms to ensure fairness and equitable dealing.
The WGL procurement function entails collaborative working with the different suppliers transparently to ease the buying process management with their different partners. Provided an organisation can provide the required products and agrees with the terms and conditions, their procurement function engages the supplier. For instance, in the contract selected, one of the clause notes that “The Supplier agrees to ensure that throughout the Term it maintains sufficient capability and capacity to provide the Services in accordance with this Agreement,” which identifies the sustainable relationship maintained with their suppliers.
Based on the provided background, this assessment focuses on the cleaning services agreement 2019 contract in WGL. From this, the different contractual terms have been assessed with their impact on the distribution of power and risk between the supplier and the organisation noted.
2.0 Selected Contract Assessment
As evidenced in CIPS (2020) quoting Keenan and Smith (2006) defines a contract as an agreement enforceable by the law between two or more persons. This is to do or abstain from doing some act or acts to create legal relations and not merely exchange mutual promises. In this regard, the cleaning services contract has been selected in WGL. In order for WGL to maintain their ISO 14001:2015 certification, they ensure that they maintain high-level cleanliness and high-quality service delivery (Woolworths Group, 2020a). Apart from the certification, the cleaning services contract is informed by the need to obtain a compliance deed and/or other Government Agency requirements, including the Fair Work Ombudsman. This is evidenced in the contract as shown in appendix 1 that note that “Woolworths has entered into a compliance deed with the Fair Work Ombudsman in relation to cleaning services. This compliance deed and/or other requirements of a Government Agency”. In 2018, WGL had been fined by the Australian Territory court due to lack of an elaborate contract for sourcing their cleaning services, which exposed their employees to hazardous chemicals (Mondaq, 2019).
2.1 Essentials of Contractual Terms
In CIPS (2020), the essentials of a valid contract are provided. As shown in figure 1, through a focus on the identified factors, it is possible to identify the cleaning services agreement’s validity in WGL.
Figure 1: Essentials of a Valid Contract
Source: CIPS Materials 2020
The identified elements of a valid contract can be reviewed as follows;
Invitation to treat (ITT)– This includes the price lists, catalogs, products on display, and quotation request. This is not part of the formal contract. Similarly, the selected contract starts with general terms and does not include ITT.
Representations– Contract requires cleaning services supplier to have the capability and capacity. Also, timing is critical; as noted in the contract, “The Supplier must provide the Services in accordance with the Timetable.”
Offer– The contract is made to people at large, commencing from 30th March 2020 and ending in 3 years’ time.
Acceptance– Made in writing below the contract with performance often constituting acceptance.
Agreement– Service agreement between WGL and the supplier
Capacity– The supplier required by the contractual terms to highlight their capacity. In specific, the clauses note “prior to the date of execution of this Agreement any matters relating to the commercial, technical or financial capacity of the Supplier that might materially affect the Supplier’s ability to perform any of its obligations under this Agreement”.
Considerations– These entail services, fees, subcontractors, and invoices
Legal Intent– This defines the KPI metrics, penalties, and termination. The contract KPIs is as shown in Appendix 2;
Legal Objects– Proposal from the organisation, approved cleaning services
Operative– Lack of any mistake, working free from undue influence and lack of misrepresentation
Therefore, from the analysis of the essentials of the cleaning services agreement, it is a fact that the contract meets all the requirements to be a valid contract.
2.2 Strategic Importance of Contract to WGL
In order to identify the strategic importance of the contract to WGL and the best practice in approaching the risks and power, the Kraljic analysis (Caniels & Gelderman, 2005) can be carried out. This is as illustrated in figure 3;
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Figure 3: Kraljic Analysis
Source: CIPS Materials
Leverage Items (Low risk and High value)– These are characterised by a high-level availability with the suppliers fully controlled to solve the risks. Costs of independent purchasing reduced.
Strategic items (High value and High Risk)– this is where the cleaning materials are categorised. There is a need for ensuring long-term availability, collaboration, and long-term relationship. This is evident from the contractual terms reducing the risks and different issues identified.
Bottleneck Items (Low value and high Risk)– These are items readily accessible from the service, hence lower risks and issues. Supply ensured, medium-term contracts, and new suppliers sourced.
Non-critical items (Low risk and Low value)- Lower implication to the organisation operations, sourced easily with easier auditing of the products. Process of purchasing simplified and emerging markets.