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.
All manufacturers want to get the best possible deal from their suppliers. However, the definition of “best” is subjective. Every partnership has different goals and non-negotiable points. We’ve found that before starting the contract negotiation process, a cross-functional team is well advised to invest the time to decide what it wants and needs from the relationship.
Artificial Intelligence (AI) is on everyone’s mind in the manufacturing industry. The nation’s largest companies are investing in this technology, and countless startups are working feverishly to stake their claim to various use cases. While AI is often positioned as a threat to human jobs, it can actually enhance how humans serve customers in many ways.
The big corporations have an inherent advantage in harnessing AI to their benefit. AI runs on data, and they simply have more of it. They have hundreds of thousands of customers. They also have more resources – both dollars and full-time employees – to utilize and monitor AI. This doesn’t mean there’s no hope for smaller businesses, though. Data can be pooled and anonymized across groups of smaller manufacturers, generating many of the same powerful insights.
My colleague Gene Ciemny recently wrote about the increase in pulp and paper costs after an extended period of price stability.
While there are common threads across contracts in different industries, there are also important distinctions in market dynamics, industry customs and terminology specific to various industries. Let’s explore some of the key factors to consider in vendor contract negotiation for paper.
Last year, in a blog post we warned of an imminent trend of rising pulp and paper costs that would soon hit the pocketbooks of any manufacturers relying on corrugated boxes to ship their products. It’s no fun to say I told you so (well, sometimes it is…) but the past year has proven us right.
If your organization utilizes a strategic sourcing partner, that relationship should extend beyond ensuring the prices you pay vendors are consistent with what is being charged across the industry. A skilled sourcing expert can identify opportunities for process improvements that may have no influence on the invoice but will have a material impact on your bottom line.
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.
Acquisition continues to be a preferred strategy for manufacturers seeking to increase revenue and create long term growth. Early stages of a merger usually center on factors like strategic fit, market footprint and business integration. There is another less exciting but important factor to consider during these talks: vendor contracts which can cause costly, tactical headaches if not identified early in the process. However, if t
he contracts are assessed early enough in the acquisition process, a company can reap benefits greater than expected through a due diligence process.
All manufacturers, distributors and retailers rely on vendors for products and services to support their operations. The relationships are typically governed by long-term agreements and when those contracts are up for renewal, the common reaction is to sign an extension with the incumbent. Assuming service levels have been acceptable, switching costs – especially for anything involving raw materials – tend to be so onerous (testing, certifications, regulatory compliance, etc.) that there’s rarely any appetite for the expense and resource diversion that accompanies a change.