Managing the beast

Managing the beast

There are some things that really should be easy, but they're not. In our personal lives, we should be able to program the VCR, keep track of the car keys and get to church on time, but they're just plain harder than they seem. So we find "work-arounds," and somehow get by from day to day.

Managing contracts with suppliers of products and services to our companies fits into this category as well - but with more significant consequences. According to Aberdeen Group, ineffective control and contract management cost businesses $153 billion per year in missed savings opportunities. Now that's a lot of car keys.

What follows are some common situations that involve contract management issues. See if they sound familiar to you and your company.

-- When do the outbound shipping agreements with different carriers expire - and what happens to our rates if we don't act to renew or rebid them? I hope we haven't already passed the window of opportunity and are stuck with current pricing, plus automatic escalators.

-- Where is that standard confidentiality and indemnification language we are supposed to use for consulting and services agreements? I guess I'll have to wing it and rewrite it.

-- How many contracts do we have for equipment maintenance, and how do the provisions compare with each other? If we could consolidate them, we'd likely gain some sort of pricing improvement, but that's impossible if we don't even know what's out there now.

-- Where is that new raw material contract that I signed off on three weeks ago? It's apparently lost somewhere in someone's inbox, and we need to start ordering parts next week.

-- Is there really a minimum order quantity on those spare parts, and a big upcharge for rush shipment? That's what the supplier says, but I can't find the written agreement (if we even have one) to verify it.

-- What's the volume threshold for obtaining rebates or better pricing on our electrical component purchases? I have a big production order planned, and maybe I should buy all the material before the end of the year to qualify. But I don't know where to turn for details on how the program works and whether it is desirable, so I guess I'll just skip it.

All told, purchases from external suppliers comprise 50 to 90 percent of your total costs. A typical Fortune 1000 company has agreements with probably 50,000 suppliers. And they are often just not managed all that well.

We all like to focus our attention on high-profile, highly strategic issues, but there is substantial improvement opportunity through better management of these dull and boring, "administrative" type of activities. How do these potential benefits sound to you:

-- Better pricing.

-- Better payment terms.

-- Improved compliance with existing contracts.

-- Decreased liability exposure.

-- Added rebates and discounts.

-- More efficient use of our time.

According to Tim Minihan, Aberdeen Group's senior vice president for supply-chain research, "companies that focus on improvement in contracting operations can cut total supply-chain costs by 7 percent and increase revenue by 2 percent on average."

I know what you're thinking: "We don't have any central database of contracts. In our new decentralized structure, just about anybody can set up their own contracts. Legal staff has been downsized or outsourced."

I agree. There has to be a better way - and I think there is.

A new generation of software tools has been developed to specifically address the issues. The new products have standard templates for creating contracts and other supplier documentation; they keep track of contracts that are in process, and file all completed ones for easy reference later; they flag upcoming milestones and dates when specific actions are needed; they permit research and analysis of legal and financial terms - and enable firms to better monitor compliance by suppliers (and customers).

"We're finding that the return on investment for our Contract Manager solution is averaging over 300 percent," says Nathanael Lentz, chief executive of Verticalnet, a supplier of procurement and supply-chain-related software and services. "While increased compliance and better discounts are the largest direct savings impacts, customers say that getting a better handle on the whole contracting area is also a major benefit that simplifies their lives and allows them to be more productive."

I don't know about you, but simplifying my life and being more productive sound like great objectives. I wonder if I can use this stuff to keep track of my car keys.

Scott Elliff is president of Capital Consulting & Management Inc., which works with clients on supply-chain performance. He can be contacted at (434) 409-4378, or at scott_elliff@ccmiservices.com.