Your Procurement team works hard to identify the best suppliers and negotiate best value agreements. Contracts ‘lock in’ those prices and terms for use by the organisation. But are those contracts fully leveraged once they are secured?
The ‘potential’ savings associated with good supplier agreements are only realised when purchases are actually made against those contracts. If people buy the same type of products from another supplier or don’t properly reference the contract when they do buy from that supplier, those potential savings are lost. That is obviously unnecessary cost.
You also don’t want surprises. When contracts expire or automatically renew without anyone noticing, there may be unexpected lapses in coverage and/or lost savings. Again, this is unnecessary cost – and risk.
In order to get the full value you contracted for, you want to make sure the supplier is complying with price, delivery and quality terms. At the same time, your organisation may have commitments as well; for instance to buying a certain volume or paying within a certain timeframe. You may also have price breaks you want to be sure you use to your full advantage. There are many ways you can lose the potential savings if you find you haven’t complied.
So, what should you look for? Here are some questions you should be asking:
- Where and how contracts are filed: Where are contracts actually held? If they are managed and filed in multiple places, and there’s a good possibility of duplicates (which represent missed opportunities for volume-based savings). Do they have consistent information? If not, it’s just about impossible to get a consolidated view of commitments or effectively measure performance.
- Contract visibility and usage: Are all pertinent contracts made visible to buyers at the time of purchase? Are buyers required to buy against the contract unless they get special authorisation? If purchases are being made with another supplier, or even with the same supplier, but without referencing the contract, all those ‘potential’ savings are being lost.
- Contract review: Are all contracts routinely reviewed for mutual compliance, supplier performance, and expiration dates? How do people know when a review is needed, or what aspects of the contract should be checked? Are there cases of unexpected expirations or automatic renewals that have cost your organisation money?
Once you have a better understanding of how things are done today, the next question is how can you improve?
- Centralise contract management: Establish a single repository of supplier contracts, common information per type, and a consistent filing process so everyone knows where to look for contracts and how to interpret them. Include all applicable documents and the supplier bid history. Establish a procedure for combining multiple contracts with the same supplier when found; negotiate higher volume discounts if possible.
- Establish and follow contract review schedules: As part of the contract filing process, develop and attach a schedule of reviews that cover all milestones throughout the life of each contract. Include periodic compliance reviews and performance appraisals as well as renewals. Establish procurement department procedures to ensure reviews at each milestone.
- Ensure contract use: If you have an eProcurement system, be sure all contracts are put into the system and associated to the proper categories and suppliers. This is much easier if contracts are held electronically. If you do not have an eProcurement system yet, or can’t hold contracts electronically yet, you’ll need some form of contract indexing and a policy that strongly encourages everyone to look for an existing contract before placing an order.
Technology, specifically procurement automation systems, can help make these changes and ensure you’re fully leveraging your supplier agreements. Find out more about the features and benefits of a good procurement system…