Implementing Cost Reduction Programmes – Contract and Supplier Management

As we said here, we are in a period of considerable economic and political uncertainty for many businesses and indeed public sector organisations too.  Uncertainty can be good if it leads to positive outcomes, but we suspect many organisations will be taking a cautious approach to planning and risk management. They may also be asking procurement functions to look at how an efficiency or cost reduction programme can be implemented.

We are big supporters of procurement playing a strategic role and helping to drive growth and revenue; but at times, our focus will inevitably be on those cost issues. So how can procurement deliver benefits, without resorting to the rarely effective (and frankly embarrassing) approach of “asking all our suppliers to reduce their prices by 5%”.

There are, when it comes down to it, only a relatively small number of ways in which the end goal of cost reduction can be achieved. We’re open to discussion here and being proved wrong, but we described six here in the first article in this series which we think pretty much covers it. Today, we will talk about the fifth in our list of six – contract and supplier management.

Too often, organisations think that once the contract is let, the procurement process is done and the work around value improvement is complete. Clearly this is not the case. In fact, we might argue this phase of the end-to-end process is even more important than the pre-contract, in that poor contract management can screw up a perfectly good piece of procurement work.

  • In the cost reduction context, you are unlikely to have the resource to examine every existing contract in great detail. The first step must be prioritisation. That means looking for not just the largest contracts by spend, but the ones that are likely to have the most opportunities – so that will often be the more complex contracts, with many users or budget holders, complex T&Cs, or variable pricing mechanisms.
  • Check that the agreed terms in the contract are being implemented. It is surprising how often procurement negotiates a “saving” in the procurement phase but it is not fully captured. That can be incorrect invoicing; or (for example) users buying products that were not included in the negotiated price list.
  • Where bonus or penalty clauses exist in contracts, check that they are being used. Again, it is surprising how often supplier under-performance is not addressed, even when there are potential financial gains to be claimed by the buyer.
  • Work with the supplier. Are there ways of changing the contract in ways that drive cost savings and are mutually acceptable? That takes us back to some of our earlier comments; for instance, looking at specifications might lead to a “win: win” adjustment that benefits both parties.
  • Whilst we are focusing in this series on cost reduction activities, contract and supplier management does lead into a wide range of opportunities focusing more widely on value; from collaboration and innovation with suppliers to drive revenue to improved risk management to reduce the chance of supply chain disruption.

Sometimes, procurement (or a professional contract manager) may be able to execute some of these steps alone. But in many cases, successful approaches will need to involve the users of the contract and the budget holders, particularly if changes to service or product delivery are required. Good negotiation skills will be needed too from whomever leads the work, along with that ability to engage and work with those wider internal stakeholders.

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