This is one more section that calls you to lead supply management with just two questions in the exam and also designated part of the Bridge Exam. Here you are being asked as supply managers to "verify" that any commitments to third parties ( i.e. suppliers) exist are accurate and complete.
Imagine that you have signed a multiyear contract with a raw material supplier that involves a minimum quantity and a financial commitment for the next three years. Obviously when you did this the CFO was in the loop and there were lots of emails that went back and forth. Now two years down the line people change the CFO has moved and so have you ( happily for this blog to a more senior position elsewhere!). The question this section asks is have you got systems that clearly lay out what your and your supplier's commitments are in terms of what is to be supplied and what is to be paid. Tomorrow when you are no longer with the company and an entire batch fails your successors and the supplier should know exactly how to deal with the situation - addressing it to the needs of the business. In other words, the essence of this section is that things should not move along in auto pilot and there should be enough red flags that go out even when folks change and much before things go out of control. Think the mortgage crisis and sub-prime lending - if only those managers had read this section!
The section also talks about Federal Energy Regulatory Commission (FERC) and the Sarbanes-Oxley Act (SOX).Check out the guidelines for interstate commerce in energy sources like natural gas, oil and the distribution of the produced electricity. The FERC is naturally also concerned about energy efficiency and conservation.
In SOX my favorite example is from Section 409 regarding reporting material changes.Let's say that you worked out a 50% price reduction for a component of a top selling product of your company, with a volume guarantee. You contracted one million pieces at that 50% price over three years as you thought that sales was going through the roof.Now the catch: If you failed to buy the 1 million or more components then you are supposed to pay some known compensation to the supplier for booking their production capacity for you.Let's say the market has collapsed and you need to cut supplies and pay compensation to suppliers. The question is that: does this changed market reality get quickly relayed in non-technical terms to the shareholders? In other words, you are supposed to prevent problems, but when they occur you must have transparent,clear systems that put things out in the open that affect financial performance.
In a similar vein is the idea of an audit committee that must have no benefit from the organization (no employment,no supplies) so that they can speak up without fear or favor with any concerns they have about systems and processes in place to verify existence,accuracy and completeness of financial commitments to third parties.