OPINION: Don’t get milked by your suppliers
We’ve all done it; stuck with the same old suppliers year after year, because they’re doing the job and let’s face it, it’s far less hassle to stay put than to make a change. Whether it’s for banking, car or home insurance, or even utilities, as long as their prices haven’t risen too significantly and you’re getting what you pay for, why go to the effort of changing?
For the consumer a failure to review supplier agreements means that at worst you’re potentially missing out on a more competitive deal (and a complimentary Meerkat), but for a business it can have much more serious consequences.
A large organisation will typically have hundreds or even thousands of contracts in place and lack of management of these contracts can have a huge impact on business performance, bottom-line and risk.
Auto-renewing ‘evergreen contracts’ are a problem we see frequently and they cost organisations millions of pounds in wasted budgets or unintentional spend. With no system in place to effectively manage contracts, they can easily get ignored or forgotten about and without realising it you’re locked in for another 12 months. Worst case scenario, a high value contract has auto-renewed just as you sign another with an alternative supplier offering a similar service, or decide that you no longer need this service at all. It’s easy to see how missed renewal dates, contract overlaps, timely supplier reviews or intended supplier terminations can be overlooked.
This can be an inconvenient truth for large organisations whether they have a procurement function or not, left grappling to manage the contracts they have in place without clear visibility of them.
Aside from wasting money, with no control over contract terms, how can you be sure that your contracts are delivering what was originally agreed with the supplier? If you’re not in the habit of reviewing or monitoring your supplier contracts the service you are receiving may have gradually moved away or deteriorated from what was originally intended. The supplier may have been providing alternative quality products (substitutes), or changed services levels or personnel (in the case of professional services) and other factors that differ from the original terms agreed – all of which could potentially reduce the value of the original agreement.
It’s also necessary to consider the changes that will undoubtedly have occurred in your business since your contracts were first put in place. Throughout the lifecycle of a contract it’s highly likely that your business will have changed in some way, whether that’s changes to pricing or other things which may affect the terms of the original contract, or your organisational needs. For example, the sum you spend with a supplier may have quadrupled since the start of your contract, putting you in a far stronger buying position. This of course should mean you are in a better position to negotiate discounts or lower rates, but it is difficult to do this without having the facts at your fingertips.
The first step towards managing contracts effectively is to have a clear and in-depth understanding of them, but this won’t happen if they’re stuffed in the top drawer of a filing cabinet or indeed held in turn by each departments that owns the supplier relationship.
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The last thing any department head wants is to be going into a new budgetary period with a legacy of unwanted supplier costs to justify and accommodate. It’s one thing to have to field tricky conversations with your CFO, but another entirely using up valuable budget on historical services that are no-longer essential to you.
Your suppliers’ contracts themselves hold the answers to many of the key things you need to know in order to effectively manage them. How often do you actually review your suppliers’ contracts and how do you get the information you need to effectively monitor, manage and measure the value they are delivering to your business?
Contract control gives you sight of which contracts are up for new renewal in the next few months. If you’re unhappy with that supplier then you have the time to put them on notice, or appraise their performance and renegotiate a better deal. Or if you wish to invite new suppliers to bid for the contract you have time to factor this work and consider your options.
Effective contract management is an essential part of the supplier management process and is only made possible if they are held in a central repository so that they are accessible for all key stakeholders.
Such a repository enables all contracts to be reviewed periodically to determine if changes are needed or even if it should be renewed at all. The growing realisation for this process to be automated has led to the adoption of contract management systems, delivering a simple and secure way to store contracts which are easy to audit and provide automated alerts and reminders if an agreement is due to expire. And a full contract management system within an integrated source to pay process can further streamline the process by automatically adding newly sourced suppliers’ contracts to the repository for future tracking.
So don’t risk becoming a cash cow to your suppliers because contracts were signed and filed away years ago. A structured and more formalised approach to contract management is the key to unlocking operational efficiencies, compliance and savings.
Daniel Ball is a director at Wax Digital.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”