Route 2 - Contract & Supplier Management

The purpose of Contract and Supplier Management is to work closely with suppliers and internal customers to minimise the total cost of ownership and to maximise efficiencies throughout the Supply Chain.

Contract and Supplier Management should result in contract procedure and process improvements, as well as increasing Procurement Function knowledge and experience which can then be used to benefit future contracts.

Care should also be taken to manage risks to changes in contracts e.g. you may require to retender if there is a substantial modification.

Vision

The overarching vision of Contract and Supplier Management is that it should :

  • ensure that the service/contract is delivered to the required standards andprovides value for money;

  • proactively identify and manage any risks which may impact on a supplier’s ability to deliver the service / fulfil the contract requirements to the desired standards;

  • improve and develop contract and supplier performance across organisations, sectors and nationally via a consistent approach which maximises efficiencies and promotes value add contribution across the supply base;

  • appropriately influence supplier activity and decisions and improve value for money, over and above cost savings;

  • ensure that the contract is effectively administered, for example from a change management perspective.

Organisations should routinely look to employ various techniques to continually improve both their own performance and that of the supply base.

There are a number of formal and informal continuous improvement methods ranging from full continuous improvement programmes through to organisational collaboration and improved internal and external communication. One of the key continuous improvement tools used in the Scottish Public Sector is the Procurement and Commercial Improvement Programme (PCIP)  designed to drive forward best practice and develop procurement activity.

 

Contract & Supplier Management can be considered successful when:

  • the arrangements for service delivery continue to be satisfactory to both parties, and the expected business benefits and value for money are being achieved or exceeded

  • the supplier is efficient, co-operative and responsive

  • the Organisation understands its obligations under the contract

  • there are no surprises

  • there are no disputes

  • professional and objective discussions over changes and issues are straightforward and easily managed

  • efficiencies are being realised

  • the Organisation’s procurement department contract and market knowledge improves, and benefits future contracts

 

Definition and Importance

Definition

There is often confusion between Contract Management and Supplier Management. They are both part of the continuum of activities that relate to post contract award management of the supplier and contracts. Supplier Management refers to the actions that apply across a supplier’s whole portfolio of contracts, and generally is accepted to be around the more strategic, longer term activities we undertake with them. Contract Management applies to the specific contract for the good(s) or service(s) being procured.

However, the fact that it is a continuum has one important consequence. It is very difficult to perform effective Supplier Management if the basic Contract Management disciplines are not in place. It would be difficult to discuss strategic partnerships, innovation or joint ventures if you do not understand the detail behind the contracts your Organisation has with this supplier, or how they’re performing day to day. Effective Contract Management is therefore a necessary condition for successful Supplier Management.

 

Importance of Contract Management at Board/Senior Management Level

An effective Contract Management strategy should be a high priority for Chief Financial Officers (CFOs) or Chief Operating Officers (Accounting Officers) and the Senior Management Teams. Contracts which deliver services or provide infrastructure or third party essentials are so central to the running of an efficient and compliant business, that managing contracts effectively has been, and always will be, a necessity. Eliminating significant cost out of the business (not necessarily by impacting supply chain efficiency/profit), complying with corporate governance regulations, managing enterprise risk and maximising revenue streams are all central functions of an Organisation’s Contract Management strategy.

Managing the information and obligations contained in a contract and the overall contract lifecycle are critical to meeting the compliance regulations. This means that the entire process of contract creation, clarity of final agreement, management (say) in a central electronic repository, and actions such as integration of contract data with back-end systems and contract performance reporting, needs to be sponsored at an executive level and rolled-out to the entire organisation (for at least the most critical/high impact contracts).

Robust Contract Management will reduce the risk to the Organisation from issues such as Conflicts of Interest and Fraud. Your Organisation must consider these areas as a vital part of its governance.  You must ensure that you take all appropriate measures to prevent, identify and remedy conflicts of interest and include measures to combat fraud through the life of the contract.

 

Contract Management for Joint Procurements

If you are entering into a joint procurement exercise with one or more public sector organisations you will have already agreed the legal status of and requirements of such an exercise.

A “lead” authority may have been agreed on at strategy stage and from a legal perspective they will be the organisation responsible for forming the contract with the awarded supplier(s), or a truly “joint” exercise may be initiated where the conduct of the procurement is entirely carried out in the joint name(s) of the participating organisations.  In either case, the organisations each remain responsible for meeting their contractual obligations.

Where you have determined that only part of the procurement will operate as a joint exercise, the organisations will be jointly responsible for those areas of activity that are declared as joint, while each organisation will retain sole responsibility for the activities carried out on its own behalf.

All of these factors determine the subsequent approach to contract management and although they will have been considered at Strategy Development stage when deciding subsequent practical considerations they must remain a factor when determining the operational approach to things such as the responsibility for contract management, how Key Performance Indicators (KPIs) will be managed and communicated and the reporting / communication network that will be needed both between the organisations and the supplier(s). 

 

Purpose

The purpose of contract and supplier management is to work closely with suppliers and internal customers to minimise the total cost of ownership and to maximise efficiencies for both Organisations and suppliers throughout the supply chain by:

  • developing and managing constructive and transparent relationships with suppliers;

  • ensuring the contract is successfully executed, including meeting all special conditions relating to the performance of the contract which may cover economic, innovation-related, environmental, social or employment-related conditions);

  • maximising value for money from suppliers and contracts;

  • providing a formalised system of monitoring, managing and continuously improving the supplier and the Organisation’s performance against the contract;

  • ensuring that all parties recognise and understand their contractual roles and responsibilities;

  • monitoring overall compliance to Key Performance Indicators and Service Level Agreements and implementing improvement plans in the event of underperformance, leveraging supplier expertise in pursuit of cost and efficiency gains;

  • realising additional savings and benefits and sharing them appropriately;

  • effectively managing the supply chain;

  • providing a focus for development of initiatives and innovations;

  • driving continuous improvement;

  • identifying lessons learned to inform future contract terms or strategies;

  • developing supplier relationships to maximise efficiency, collaborate towards common goals and reduce waste, environmental or social risks;

  • Support the achievement of strategic goals, such as attracting Community Benefits through the contract;

  • monitoring Sustainable Procurement benefits through the life of the contract and ensuring that targets are met;

  • measuring Community Benefits achieved vs anticipated.

 

Benefits

Within legal limits, both the Organisation and supplier should be motivated and enabled to deliver additional value, over and above that which was specified in the original contract, e.g. not simply extending the expenditure. The process should deliver benefit by:

  • providing formal routes of engagement at different levels of management, thereby allowing opportunities for improvement to be exploited at senior levels

  • ensuring supply costs are contained and minimized, and that opportunities for improving cost effectiveness and efficiencies are explored and progressed e.g. packaging, service level definition

  • proactively ensuring that the business needs under the contract are delivered, ensuring both the customer and supplier’s obligations are understood and managed, reducing reactive ‘incident resolution activity’ to minimise the cost of failure and of managing the relationship

  • promoting proactive issue resolution and ensuring clear escalation paths exist within both organisations

  • using the same standardised approach for a number of suppliers/customers, which will embed operational efficiency, consistency and quality

  • limiting the number of people involved to ensure consistency in process and communication - ensuring the right people are involved in the right activities at the right time with the right information

  • encouraging the supplier to improve their product or service in ways which provide additional value to the customer and to future customers, promoting efficiencies within both organisations which will develop the skills of the employees and help the supplier’s staff to deliver a better service.

Consideration must also be given to Planning, Sustainable Procurement and Risk Management throughout this stage of the Journey.

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