Written by: Mike Edmunds
Posted on: 04/08/23
Why is Supplier Contract Management More Important Now than Ever Before?
The answer, I’m sure you’ve guessed by now, isn’t straightforward. There are different factors to consider, but let’s break it down into parts and properly examine each one.
One factor to consider is the rapid growth of globalisation and the increasing importance of good supplier contract management. The expansion of international markets calls for increasingly skilled contract negotiation and navigation, as by crossing borders to source for dynamic supply chains, you risk falling into a web of unfamiliar legal frameworks which could drastically affect the cost and speed of your supply network.
This brings me to my next factor; supply chains themselves. As we have the ability to stray further and further afield to source evermore distant supplies, it stands to reason that the complexity of our supply chains will also increase – and they have. It’s common knowledge that a business’s scope 3 emissions (those that are not directly caused by the business in terms of its operations but are the indirect consequences of its suppliers) often make up the largest portion of its total emissions. This is a concern for supply chain managers, procurement professionals, and sustainability officers alike. The increased complexity of supply chains directly impacts a business’s ability to control the scale of their scope 3 emissions – but this doesn’t change the fact that businesses must control them.
Leading on from this, the next factor to consider is risk and risk mitigation. We have already had two disruptive events (COVID-19, Ukraine conflict) which have, for some, exposed the vulnerability and fragility of their business’s supply chains. The larger, more complex, and wide-reaching the supply chain, the more potential you invite for things to go wrong. Averse weather patterns disrupting shipping, pandemics halting production, localised conflicts causing delays and threatening the safety of workers. It is so important to ensure that contingencies and mitigation strategies are drafted into contractual agreements to protect the overarching business from these risks, and more.
And what about cost? For many years this has been the core driving factor pushing businesses to innovate and try new techniques of supply chain sourcing and management. The bottom line is and will continue to read that if a supply chain is not cost effective, it cannot survive. It is also where good contract management becomes crucial. Pricing terms, volume commitments, and penalties for non-compliance are introduced and protected in the legal terms of binding contracts. The ability to manage these effectively, to track and enforce them, will make all the difference to conversations and negotiations surrounding this documentation.
All of these factors in some way balance upon the quality of the relationship with suppliers. When suppliers are far away geographically, there may be language barriers which stand in the way of clear communication and diplomacy. When supply chains grow complex, it can be difficult to keep track of the volume of contracts and clauses in place to regulate for compliance. In the event of a supply disruption, having a dynamic relationship with alternate suppliers to meet your needs can avert disasters with ease. Cost negotiation, too, can hinge on the strength of the relationship between procurement professionals and suppliers – the stronger the relationship, the better the savings.
So, how can you ensure your contract management strategy is up for the task?
Digitisation may be the low hanging fruit, but it is popular for a reason. Removing the human error side of manual administration decreases the risk of contracts ultimately working against the better interests of the business. Automatic alerts remind contract managers of impending renewal or expiry dates and ensure a negotiating opportunity never passes by unheeded again. An online repository of digital copies of contracts makes it easy to search for and find contracts which require further scrutiny, or for compliance purposes. A single holding place for all contractual documentation ensures that the most up-to-date version of each contract is used and referred back to every time. The production of performance reports for stakeholders and decision-makers within the business becomes hassle-free. Become, and stay, audit-prepared through the increased level of organisation.
Finding the right software provider who can promise all this and more will revolutionise your business for the better. By investing in a partnership with a solution who can provide all the things I have discussed in this article you will make incredible, tangible returns.
This month I hosted a webinar with guest speaker Jeffrey Rajamani entitled ‘How can you Source a Sustainable and Ethical Supply Chain?’. Catch the recording if you haven’t yet!