Regular readers of Spend Matters or Sourcing Innovation will be familiar with the recent series co-authored by Pierre Mitchell and myself on contract lifecycle management (Parts 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10). In the series, we stress the importance of CLM (Contract Lifecycle Management) because while it’s arguably one of the most sleep-inducing acronyms in the procurement and supply management space, it’s also one of the most important.
This is because it overlaps source to contract, procure to pay, and source to settle/pay, and also intersects with risk management, performance management, change management, and supplier (relationship) management. It’s a very extensive process that begins when the need for a contract has been identified and ends only after the contract has ended and the final post-contract review has been completed and includes the vast majority of sourcing and procurement activities.
While sourcing is critical to identifying potential savings and negotiation is key to quantifying those savings, procurement is the key to actually capturing those savings.
The reality is that identified and negotiated savings only materialize if the right product is ordered from the right supplier at the right time and for the right price, and shipped using the right method to the right location. All of these requirements are important:
Even a minor difference can add cost. The wrong laptop with an unsupported OS can require more IT support or a reinstall of the right OS, the wrong power tool may not support a battery that lasts a full maintenance worker’s shift in the field, and the wrong laser cartridge will just sit on the shelf because no one will have time to return it.
As per a previous post, if negotiated savings depend on volume or spend thresholds being reached to realize a rebate or discount, then repeated orders from the wrong supplier will result in the threshold not being reached and the negotiated savings being lost.
There is an opportunity cost associated with every dollar spent. Ordering a 3-month supply of non-critical office supplies ties up cash that could be spent on more profitable sales or cost reduction initiatives.
Let’s say a contract is for $50 a laser cartridge, but the AP clerk doesn’t catch that the supplier is still charging the old price of $60. If the organization orders over 100 a month, that’s over $12,000 a year lost on that one item alone.
If a shipment takes 7 days with regular shipping, the demand is stable, and the order is placed on time, then it should always ship with regular shipping—not expedited shipping at triple the price.
If a product is needed by a user located in a remote field office instead of at HQ, having the product shipped to HQ—just to have it re-shipped—doesn’t make any sense.
Generally, the only way these can all happen simultaneously is if the organization has a modern e-procurement system that allows the average employee to:
- Easily identify the right product and supplier using an integrated portal that brings up all products and services from contracted or approved suppliers during a single search
- Be confident that the price is correct, as it supports override pricing for any price in a contract
- Be confident that the shipping is correct, as the platform is configured with the right shipping instructions for each supplier based on the products being ordered
- Be sure that it gets to them, as they can select the location where the product is needed and not have all shipments default to HQ or the warehouse
Even if you decide that you should start with contract management to get your contracts under control, don’t forget that the next step is to acquire a modern e-procurement platform to see that all of those contracts get enforced.