Why You Should Manage Your Vendor Contracts During Budget Season

Posted by Ben Mrva on Jan 9, 2018 7:00:00 AM

Why You Should Manage Your Vendor Contracts During Budget SeasonFor anyone working at a company with a calendar-based fiscal year, chances are that department heads are being asked to “do more with less,” or at least to increase output at a faster rate than costs. As anyone with budget responsibility knows, it’s no easy task to fund realistic pay increases for appreciated employees let alone accommodate growth in other expense areas.

At the same time, most manufacturing companies put aside a large chunk of their budget dollars for third-party providers, often as a method to tap into the latest technologies and product functionality. Many of these relationships are governed by long-term vendor contracts. At first glance, it may appear the related costs are cast in stone; this is not the case, however. An optimized spending plan requires reconsidering in-force vendor contracts to explore potential savings. Asking the right questions of valued partners can often lead to win/win outcomes and is a best practice for efficient vendor contract management.

Reduce Costs Today, or Reduce Costs Tomorrow

First, examine any vendor contracts due to expire over the next 18-36 months. This should already be standard procedure, but budget season offers a chance to get caught up. Many vendor contract agreements require 12-18 month notice of intent to terminate. Without appropriate lead time, any threat to consider alternate providers lacks credibility and negotiating leverage is nonexistent.

It’s worth consulting third-party benchmark data and/or domain experts to determine how your manufacturing company’s vendor contract terms stack up to the prevailing rates. The market for manufacturing technology is always changing, with prices on a downward trend in most cases. A favorable deal struck even 1-2 years ago may already be above market.

Explore the possibility of renegotiating above-market contracts with more time to run, offering to extend the term. This approach works particularly well with good vendor relationships and, ironically, when you don’t intend to change suppliers. The long-term revenue surety and goodwill generated provide an ideal option for your third-party provider. On the other hand, if presented with objective evidence of market rates a refusal to engage could endanger a secure client.

Always Double Check

It’s not uncommon for vendor invoices to fall into a routine approval pattern. If the balance due is in line with the run rate, it must be correct. Periodic audits of these bills reconciling to contract terms provide multiple benefits. It doesn’t reflect lack of trust, or a vendor “pulling a fast one.” If the manufacturing company didn’t notice a volume threshold or other discount kicking in, it’s easy to understand the vendor overlooking such contract terms as well. Manufacturing companies may be entitled to go – forward with cost reductions – without renegotiation- and perhaps even credit for past overpayments. As an added benefit, such auditing demonstrates an appropriate level of third-party diligence – an area of regulatory focus.

Given growing demands to fund security and compliance initiatives while staying ahead of market trends and preserving the bottom line, manufacturing companies cannot afford to let budgeting forget to budget for vendor contracts Fortunately, this category holds potential for some fairly easy wins.

Topics: Vendors & Contracts