when things go sour, court is the last resort

We Americans present a real paradox to the world. On the one hand, we're borderline lunatic optimists—whatever it is, it'll work; nothing can or will go wrong; and the other guy will do the right thing in the end. On the other, we're borderline lunatic litigants. We'll sue anybody—our neighbors, our dry cleaners, our family members—over faults, errors, injuries, and slights, including imaginary ones.

Regrettably, the supply chain management world is no exception. Entirely too many consultants and academics are spending too much time and making too much money as expert witnesses and advisers to lawyers in supply chain management litigation. There may be money in it, but it's not value-adding.

Almost any element of supply chain interaction has the potential to generate enough heat to get a blazing lawsuit going. But three areas are particularly vulnerable: information systems, warehousing, and transportation. These are where billions of transactions with outside parties take place, each presenting an opportunity for things to go wrong. And do things ever go wrong.

Take information systems, for example. The tales from the front regarding systems problems, gremlins, failures, and blow-ups are legion—and legendary. The whole world knows about the consequences of a delayed enterprise resource planning (ERP) system implementation at a world-famous candy maker— and the reported consequent inability to ship during the year's peak season. Likewise the world—least-wise the supply chain world—knows all about another ERP failure at a prominent appliance maker.

It's not hard to see where the trouble lies. Any system is a complex entity, and complexity means lots of opportunity for glitches or worse. Those can and do lead to litigation.

In warehousing, too, a million things can go wrong. Failure to ship on time. The provision of sub-standard service to the most important customers. Shipment errors. And so on, and so on.

Ultimately, these failures constitute a breach of contract and provide the basis for a lawsuit. Whose fault? That's the question the lawyers, abetted by their consulting and academic hired guns, must settle.

The story is much the same in transportation. There, too, plenty of things can go awry, resulting in late delivery, non-delivery, mis-delivery, or shipment damage. As with warehousing, each of these missteps opens up the possibility of litigation.

Why things go wrong
As for what goes wrong, it usually comes down to expectations and communications. When salespeople oversell and a naïve buyer doesn't probe hard enough, the stage has been set for disappointment. When the buyer does- n't disclose everything about products, processes, and customers, the software or service provider is forced to react—under stress and with insufficient resources.

When circumstances change and the parties insist on sticking to the letter of the contract instead of modifying it, they put the entire relationship at risk. If provisions and processes for changing performance targets—and resulting penalties and bonuses—haven't been built in, bitterness over "easy money" or "impossible demands" can poison the working relationship.

When the service provider doesn't provide unspecified best-in-class solutions, both parties become frustrated. When the internal legal staffs take charge of the contracting process, and dense, incomprehensible, and rigorous language replaces flexible statements of intent, a budding relationship can be snuffed out.

When both parties are unrealistic about benefits and mutually over-promise to top management, to customers, and/or to employees, someone in the chain is going to figure out that things aren't going as promised. Any of these constituencies can turn dangerous upon discovering that they've been shortchanged.

We shouldn't have to say it, but entering into a software or service arrangement without a written contract is an open invitation to litigation, which is, like international trade, warfare conducted by other means.

The right way to fix things
The best "fix," of course, is prevention. That means starting off with mutual full disclosure and realistic expectations. It also means acknowledging from the outset that problems may develop and building problem-solving, SWAT-team, resources into the implementation team, to put the wheels back on as soon as they start to wobble.

Inevitably, a problem will arise that proves intractable, and here's where it is vital to have conflict resolution processes and responsibilities defined, in place, and tested— well in advance of implementation. The key to both of these approaches lies in establishing broad working relationships throughout both organizations. If the relationship is important enough to both companies, include the CEOs in the mix.

Take these steps, and the number of issues that linger and fester should be relatively small. And making the problem-solving and conflict resolution customer-centric (to the customer's customer) ought to minimize the external impact of internal problems.

Arbitration or mediation?
But what if the two parties go through the conflict resolution process and are still unable to work out their differences? Is it then time to call in the attorneys? No, indeed. Here's where an unbiased outside consultant can assess the situation and deliver an opinion. The consultant can also facilitate negotiations toward a monetary and/or operational settlement that is fair to all.

Mention conflict resolution processes, and most people immediately think of arbitration or mediation. In our opinion, arbitration is not much of an option. It simply provides an alternative arena in which the same combatants and surrogates battle to the financial death. The same law firms are involved. The same expert witnesses are in play. The arbitrator may not have an interest in a rapid resolution—and the lawyers certainly don't. All the drama simply plays out under a different aegis.

Mediation, however, is a different story. People are beginning to recognize that mediation can offer a speedier, lower-cost alternative to litigation for resolving disputes. Contrary to some thinking, it is not an informal, feel-good process, but an organized approach to finding mutually satisfactory solutions.

As with almost anything else, mediation has its upsides and downsides. In addition to the time and cost advantages, mediation's upsides include its non-binding nature. That is, unlike arbitration, mediation does not require that the disputing parties accept the mediator's recommended solution.

But that same non-binding nature can also be a downside. Because the mediator has no real authority, closure cannot be reached without mutual agreement. Of course, if agreement cannot be reached, the options of arbitration and legal recourse are still open.

We've made our fair share of money as expert witnesses, but we still maintain that litigation is a costly, soul-searing, and ineffective way to resolve supply chain disputes. Building relationships the right way from the beginning goes a long way toward reducing the potential for supply chain litigation. Finding advisers to help sort out real—not judicial—responsibilities and consequences, and working from the beginning toward a fair negotiated settlement—we think these are infinitely preferable to the current debilitating wave of supply chain litigation.