Negotiating new vendor agreements might be the part of the supplier contract process that garners the most attention, but it’s the careful attention to detail after the contract is signed that promises will deliver hard-fought savings. We don’t mean to say that vendors are always looking to pull one over on you after you have signed on the dotted line. Honest, human errors do occur on both sides of the contract, and maybe more often than we’d like to think.
Internal and external circumstances change over the life of a contract, leading to results that might be very different from initial expectations. This is why invoice auditing and continuous benchmarking are crucial parts of any vendor contract management program.
Small Tasks and Small Dollar Amounts – It All Adds Up
For example, vendor invoices can be complicated. Paying the balance due and moving on can certainly be tempting, especially when the amount owed is financially feasible at that point in time. However, we’d caution to always keep in mind that any tiny errors in the current invoice will be incorporated into future invoices if they aren’t caught, and can grow much larger along with volumes. A $100 error, for example, could easily add up to a painfully high number over thousands of orders.
Most of the time, these additions aren’t actually errors—in our experience, they’re often miscommunications. Maybe a technician who’s unfamiliar with the contract terms made an operational request in the name of efficiency without thinking about what impact it might have in terms of cost. Or perhaps a one-time wasn’t identified as a one off and found its way into the contract as an additional service that adds additional cost.
Most of the time, vendor contracts include so many moving parts that a push on Button A can have an unpredictable impact on Lever C. In previous posts, we have talked about how contract addenda can have disastrous consequences, and why consistent invoice audits can prevent these surprises from occurring.
So, why don’t manufacturers take the right steps to prevent these mistakes, or at least find them early on when the impact to the bottom line isn’t as drastic? The answer: Invoice auditing is time-consuming, wearisome work. One invoice might only require up to 3 hours of an analyst’s time, but multiple invoices can add up to months of daily effort, and the number of invoices will only continue to grow. Thankfully, there are automated tools capable of performing these tasks at a fraction of the cost.
Continuously Monitoring The External Economics
Benchmarks are another area manufacturers should monitor during the term of the contract. Manufacturers understand that fine-tuning operative metrics can score significant savings, but this process requires expertise, including a thorough understanding of specific industry standards that vendor cost benchmarks can be established against. For many manufacturers, that type of experience can be hard to come by.
Vendor cost benchmarking tools with access to current vendors’ terms and conditions can provide differing level of alerts (think of a traffic light), to highlight areas that need attention. These tools will keep evolving—some of them might even deliver real-time data. But still, the true value is in the depth and quality of the data itself within the tool, and the outcomes of using that data by taking action. Using these tolls can afford your FTE resources to focus on other priorities within your operations.
The Bottom Line
The complexity that comes with managing your vendor contracts, monitoring invoices and understand how the market may have changed since signing with the supplier is only going to increase. The “out of sight, out of mind” principle certainly doesn’t apply here.
Using automated tools to eliminate the hours of time involved in auditing invoices and searching for relevant benchmarks will increase the efficiency, improve the quality, and likely identify areas where costly errors and savings can be uncovered.
If you want to know more about how automation can help your company, if it has been a while since you've audited the pricing on your contracts against industry benchmarks, or if thinking about supplier contract renewals gives you a looming sense of dread, contact Jim Kurtz for an initial assessment.