– All contracts are risky. These would be aspects of the contracting process that could go wrong. There are a lot of risks of this type and the contract manager must try to be aware of them at all times. Jim and Susan have crossed swords several times in purchasing decisions. Jim thinks Susan doesn`t understand the realities of the situation; Omega is a well-known company that has worked closely with Donna. Susan believes that Jim is too conservative and that a more proactive approach would reap great rewards of quality and price. She is determined to use SKS. – Find an entrepreneur small enough to be enthusiastic about our routine business, or a large entrepreneur who is engaged in achieving economies of scale and efficiency savings for our routine activities. The enthusiastic small entrepreneur will work hard to meet our needs, which means reducing risk and maximizing rewards. Similarly, the Grand Contractor, capable of achieving economies of scale, will offer a fairly direct reward. Given this model, we only consider the intrinsic benefits of the products we buy, not the contractors to whom we buy them. The model serves as the basis for a more in-depth review of the supply base we have.
In terms of risk, it is high-risk contracts that require a great deal of attention to identify risks and, likewise, quality contracts are likely to bring the greatest benefits. We must of course remember that “reward” is often linked to value added, which can help to increase profitability rather than lead to direct profitability gains such as lower purchase prices, although in some situations the reward can naturally directly increase profitability. We will look throughout the book at how to mitigate or eliminate these risks. The third common approach is non-financial rewards – where the customer no longer has to pay. The reward could be extra work: A game console manufacturer offers its most powerful OSP the most extra volume at peak times or reorganizes the work of the worst supplier. A consumer goods company rewards agents with a product for exceeding performance targets. Not only does this motivate agents, but it also makes them true brand ambassadors who, as product users and experts, can take care of consumers.