Benefits of contract management in purchasing
In the current moment of economic crisis that the world is experiencing, the purchasing area is going through several challenges.
These include the increasing pressure to reduce costs and optimize financial and operational performance, the increase in the complexity and volume of contracts to be managed, the need to automate processes related to this area and the emergence of new regulatory requirements.
These factors make it essential that procurement and contracting processes converge very closely. This statement, made by the Chartered Institute of Procurement and Supply, clarifies the relevance of this issue for organizations.
In addition, this scenario requires procurement professionals to increasingly develop certain soft skills (such as judgment, strategic thinking, analytical thinking, common sense, cultural and emotional intelligence) to manage demands related to contract management.
In this text, we will discuss the benefits of contract management in purchasing, in addition to presenting strategies on how to adopt it successfully in your company’s day-to-day.
The importance of contract management in purchasing
In short, the contract management process can be understood as the interaction between suppliers and buyers that guarantees the performance of obligations (by both parties) in a purchasing relationship.
There are five essential points that should be contemplated in this process, whether in the purchasing sector or any other department:
- Goods and services: accurately describe what will be provided by the supplier, which avoids misinterpretation;
- Prices and payment: define what are the costs of each product or service, how and when it will be paid and what are the penalties in case of delays;
- Confidentiality and proprietary information: decide who will own the intellectual property if something has been developed in partnership. In addition, in the case of information that cannot be disclosed, it is essential that there are confidentiality clauses to protect the company that owns it, in the best possible way, against leaks;
- Disclaimer: limit the other party’s ability to file a lawsuit and recover possible damages – see more details on this item at Incoterms 2020;
- Violations and breaches of contract: set conditions if either party decide to terminate the contract.
In addition, according to the Purchasing and Procurement Center article, the contract management process includes the following steps:
- Manage the delivery of services in order to ensure compliance with the deadlines set;
- Establish a fruitful relationship between suppliers and buyers;
- Manage the contract itself, ensuring that the clauses are in line with the negotiation and respected by all. Make sure that the purchasing activities follow what has been agreed upon;
- Seek improvements, consequently increasing efficiency and profitability;
- Implement changes when necessary, as in long-term contracts, changes regarding activities, requests and available products are common.
There are also strategies that can be adopted that help in the better management of purchasing contracts:
Using contract management software for organized archiving of information is a great option, since it allows having a single database of related documents. If this management is done by different areas (Purchasing and Legal), it is important to ensure coordination and communication between them.
Audits are crucial to improve supplier performance (punctuality, quality controls, pricing and payment schedules) and ensure the organization is acting in accordance with defined rules and regulations – see the benefits of compliance in purchasing.
Improve risk management
Delays in the delivery, late payments, mistaken inventory counts, among other risks, can be avoided if there is an efficient management of the contract with the supplier.
Practical tip for contract management: prepare checklists
Performing checklists is an efficient way to describe aspects and good practices related to contract management. The checklist can be divided into three columns, contemplating the activities to be performed, the stakeholders involved and the frequency to perform them (use the periodicity that makes more sense for your work routine: daily, biweekly, monthly, semiannually, annually, at the beginning or end of the contract).
In order to optimize the purchasing sector’s time and make the list of activities more organized, it is ideal that they be divided into four main blocks. See below the topics and some suggestions of tasks to be contemplated in the checklist:
1. Planning and Preparation
The definition of policies and procedures for contract management (e.g., establishing the responsibilities of the parties, assessing the need for staff training, creating an action plan, and listing possible risks).
2. Pre-contract period
Phase after the negotiation, in which the document is revised again in order to detect possible errors, which avoids risks for the company. In addition, at this stage it is important to ensure that the documents related to the contract are consistent and that all parties receive the updated versions.
3. Contract period
It refers to the moment when the contract is active. One should pay attention to its optimization and the detection of trends and opportunities for future contracts. It is important that the documents are in the management tools and their execution is monitored through performance indicators.
4. Post-contract period
Stage in which the contract is no longer active. It considers the tasks related to its closure and the elaboration of final evaluation reports.
In this article, we brought some aspects related to contract management in purchasing (its importance, strategies and practical tips to adopt it), which helps the procurement team to promote the operational and financial optimization of its sector.
The purchasing professional must be attentive to strategies that guarantee the best products and services for a fair price, with the fulfillment of the responsibilities formalized during the contracting process.
Soluparts offers the Annual Purchase Contract. With it, the client guarantees the prices quoted for one year – from the signature of the document – and only needs to send the purchase order of the desired part when it was necessary, increasing productivity, reducing costs and optimizing the time of the professional in the area.
Talk to our specialists and learn how to simplify contract management in purchasing: CHECK OUT THE ANNUAL CONTRACT