A study conducted by the International Association of Contract and Commercial Management (IACCM) found that poor vendor contract management processes cost companies as much as nine percent of their total revenues. Although this was a cross-industry study, there is little reason to believe manufacturers, distributors, or retailers fare any better or that the picture has improved since 2015. With so much money being left on the table and the drumbeat for cost efficiencies sounding as loudly as ever, manufacturers are seeking new ways to make this area easier to manage more effectively.
Impacts and Options to Identify Cost Savings Initatives in Procurement
The classic mistake in vendor contract management that contributes to lost opportunities for cost savings is waiting too long to engage in the renewal process. The problem lies in the task of tracking contract dates, which typically falls between the cracks of departmental responsibilities, even at manufacturers large enough to have a procurement function. This simple lapse can trigger an auto-renewal and relinquish nearly all negotiating leverage to the vendor.
Another common contract management misstep that increases expenses associated with vendor relationships is the failure to apply sufficient scrutiny on market conditions throughout the life of a contract. Market dynamics evolve so quickly that a well-negotiated contract may end up outside market parameters by the middle of its multi-year term or, in some cases, even earlier. When armed with relevant market data supporting a compelling case for renegotiation, most vendors are willing to engage in early renegotiation of a contract rather than face a hostile relationship or heightened risk of non-renewal. The manufacturer’s concession will likely be an extension of the contract term, but given the infrequency of actual vendor churn, this is usually a reasonable price to pay.
Impacts and Options
The expense associated with less than best practices around vendor contract management extend beyond staking out the best negotiating position by monitoring renewal dates and market variable, e.g., the potential for a failed audit. Auditors require a certain level of manufacturer diligence with regard to vendor oversight.
Companies must regularly update internal audit policies to create such safeguards to address any areas of exposure before they are flagged by outside examiners. Failure to do so is likely to result in an invasive, disruptive and expensive encounter with the various agents of the oversight process.
To mitigate the risk of this and other consequences associated with vendor and contract management practices that are not adequate, many manufacturers engage with strategic sourcing partners to assist in the process. This enables them to avoid this type of mistake and to provide the benchmarks and experience required to optimize their negotiating position.
In addition, there are options available for automating the process with specialized tools developed for vendor and contract management. Basic contract management software packages are available today and can be effective at tracking expiration dates if someone is assigned clear responsibility for monitoring and following through on the necessary steps.
A key component missing from many legacy solutions, however, is current, valid benchmarking data related to the market. This feature is critical to ensuring that market appropriate values are supporting an active contract from signature to renewal. A single-view dashboard in your contract management software showing whether active contracts are within market tolerance – for both pricing and performance metrics – streamlines and improves the effectiveness of a manufacturer’s vendor contract management.
A strategic sourcing management firm is the best source for this type of solution and, preferably, that firm should offer the capabilities as a product available for licensing as well as providing an option to utilize it as a service administered by them. A firm that offers this combination of automation and experience is the first step to delivering the strongest results your manufacturing, distribution, or retail organization can take to its stakeholders.
