Contract Management and Supplier Management are essential procurement activities to ensure that value is maximised from existing contractual arrangements and supplier relationships.
For many companies, Procurement spend represents more than %40 of their revenue and yet they lack formalised approaches to ensure that contracts are delivering expected benefits and suppliers are delivering value to the organisation beyond simply meeting their contractual obligations.
Typical challenges include:
- An increasingly complex business environment and continual drive for value from procurement, yet a lack of processes to measure value achieved
- Increased regulatory requirements – requiring tighter controls and standards (financial, environmental, ethical) on companies and their supply chains
- Lack of a formal governance framework and processes for managing suppliers according to their strategic importance
- Strategic suppliers are not treated as business partners who can help improve performance and increase value
- Lack of internal processes and data to assess the performance of contracts and achievement of expected benefits
- Lack of engagement with internal stakeholders as to the effectiveness of contracts and performance of suppliers
- Key performance indicators (KPI) written into contracts are not measurable or don’t give an accurate and complete representation of supplier performance and/or are not used to manage supplier performance
Supplier Management enables companies to manage their suppliers according to their strategic importance, such that effort is invested in developing deeper relationships with truly strategic suppliers (high spend and strategic importance) and not wasted on tactical suppliers (one-off or commodity spend).
Identification and management of strategic suppliers provides the opportunity for companies to derive competitive advantage from those relationships, through suppliers bringing their best people, pricing and ideas to the table. Improved collaboration has been shown to deliver benefits to both the customer (e.g., innovation, new products or services, price reduction) and to the supplier (e.g., supplier development, growth).
Contract Management enables companies to continually review the performance of contracts to ensure that they are working effectively and delivering expected benefits. Regular review of relevant KPIs with internal stakeholders and review of performance with suppliers ensures that the contract continues to deliver value to the organisation and suppliers are meeting expectations. Where either the contract is not working as expected or the supplier is not performing, remedial actions plans can be put in place to address short-comings.
Our approach to improving Contract Management and Supplier Management is to work with our clients to:
- Achieve executive-level recognition of the opportunity to increase value delivered by these activities and secure sponsorship for improvement initiatives
- Increase the focus and effort applied to each of these activities, including identification and engagement of key stakeholders
- Establish governance frameworks and implement supporting business processes, templates and tools
- Invest in developing and coaching client staff in new processes
- Ensure incentives are aligned with desired outcomes (lowest Total Cost of Ownership and maximum value from supplier collaboration, not lowest price)
- Engage suppliers to explain the changes and likely benefits from their participation
The following are outcomes of this approach:
- Executive-level recognition of the value from managing existing contracts and supplier relationships
- Cost savings and increased innovation through collaborative efforts with suppliers
- Reduction in supply risk through more transparent supplier relationships
- Assured delivery of contract benefits and improved supplier performance
- Procurement savings – typically in the range of 2-5% of spend under contract
- Alignment of business strategy and procurement activities
- Improved supplier management and contract compliance
- More collaborative, win-win supplier relationships
- Improved supply risk management and less supply chain disruption
- Improved spend visibility
– BACK TO CONSULTING
"After undertaking a broad diagnostic, GRA identified some great opportunities for our business. The GRA team worked effectively with management to prioritise the key areas of focus in terms of inventory reduction, freight cost optimisation, distribution network structure and broader organisational processes such as S&OP."
– Andrew Coventry, Catalyst Investment Managers Pty Ltd
- 20-40% inventory investment reduction
- increased service levels ranging up to 99.9%
- 10%-15% reduction in supply chain operating costs
- 5%-20% spend management savings
- the ability to fund business initiatives from operating cash flow (OCF) improvements
- improved return on capital employed (ROCE)
- a minimum 3:1 ROI (10:1 to 30:1 typical)