contracts in supply chain management

The Importance of Contract Management & Negotiation in Supply Chain Management

The importance of contract management is often pushed aside by procurement companies. But, establishing strong contract and risk management for supply chain management professionals is one of the easiest ways to reduce risk and make deals that benefit your business. Once you establish the best way to manage your agreements, you will also boost productivity levels and reduce costs.

What is contract management in supply chain?

Contract management is a necessity for procurement companies, but it doesn’t always get the same energy and resources as other processes. As supply chains diversify, finding ways to reduce risk and ensure high productivity levels while maximizing the company’s value is a top priority for many procurement professionals.

supply chain contract management
SCM – Supply Chain Management. The Words in White Color on Cloud of Yellow Words on Blue Background.

Contract and risk management for supply chain management professionals is a critical component of this process. It can save time, boost your competitive edge, and add adaptability while improving your bottom line if done efficiently. By investing resources into understanding and optimizing your contract management and contract negotiation in supply chain management, you can ensure your business is equipped to take advantage of any opportunity thrown its way. 

Using contract management to improve your supply chain performance

If done correctly, the contract management process offers opportunities to increase your company’s value and reduce pitfalls caused by risk exposure. This means that effective CLM is directly correlated to your company’s health and performance, so you will want to dedicate time and energy to ensure that your management process is top-notch. Once you do this, you can mitigate potential supply chain risks and make the best deals with your partners. 

Here are some of the ways supply chain companies can benefit from optimized contract management practices:

  • Providing a frame to standardize and optimize document preparation, contract negotiation in supply chain management, renewals, and more.
  • Lowering your business expenses and increase your profits by improving your contract lifecycles.
  • Ensuring you and your partners meet all of your obligations and commitments through advanced agreement oversight. 
  • Reducing your company’s legal and financial risk exposure, as well as simplifying the process of creating policies and contingencies to identify and reduce new ones.
  • Boosting your relationships with other companies by increasing your deal performance, making them more likely to form partnerships with you in the future.
  • Speeding up essential tasks and reducing the need for low-value repetitive tasks such as data entry and the signing process.
  • Making it easier to analyze data, create accurate reports, and ensure the best prices and terms from vendors.

Types of supply chain contracts

Understanding the different types of contracts in the supply chain is essential to solid CLM as they all have their strengths and weaknesses. Project managers who stay informed on the various types of contracts in supply chain management will know which one to use and when making it easier to execute them successfully. 

supply chain contract types

Accidentally using the wrong type of procurement agreement leads to faulty contract negotiation in supply chain management and could cost your company more money in the long run. So, here are some of the most common supply chain contracts and the best situations to use each of them. 

Fixed Price Contracts

When you know the exact scope of work, this is the most beneficial type of agreement to use. Also referred to as lump sum contracts, these agreements are the best way to keep costs down when the scope is clearly defined. There are three subcategories of fixed price agreements, fixed firm price, fixed-price incentive fee, and fixed price with an economic price adjustment, each used in different situations.

Cost Reimbursable Contracts

When the project scope isn’t clearly defined or is likely to change, it is best to use cost reimbursable or dispersable contracts. These agreements are made to keep the parties on schedule and below budget. When they’re used, the seller is reimbursed for the cost of the project upon completion while earning a profit fee. The subtypes of this deal include cost plus fixed fee, cost plus incentive fee, cost plus award fee, and cost-plus percentage of the cost.

Purchase Orders

Anyone in the procurement industry is probably familiar with POs. These agreements are typically used to define the relationship between a company and its vendor and hold each party liable. For example, the buyer is legally obligated to pay the agreed-upon price so that they do not try to refuse payment. The PO usually includes the item type, number of items, and the agreed-upon cost. 

Time and Materials Contracts

When the seller provides labor, a T&M agreement is typically used. In this arrangement, the risk is evenly distributed between both parties. It’s used when you outsource your labor to another vendor or expert and lists the necessary qualifications. Applicants then submit their bids for the project.

Tips for contract management in supply chain management

Traditionally, contract management and contract negotiation in supply chain management is conducted manually using paper, email, and unorganized computer files. However, this often leads to low-performing deals, poor business relationships, unproductive operations, missed opportunities, and low-profit margins. As you can see, this is an ineffective way for suppliers to manage their agreements, and organizations that still rely on manual management should look to invest in an automation platform that will improve their CLM process

Here are some of the ways to use software to boost contract management in supply chain management:

1. Establish templates

Standardized templates are one of the best ways to streamline contract and risk management for supply chain management professionals. You can simply create a template for each of the types of supply chain contracts and adjust the information as needed for specific vendors. Additionally, templates make it easier to adhere to legal regulations and make the most of the deal to ensure that you don’t miss any critical information. When you use templates, your partner relationships and productivity will also increase as you can close well-performing deals in a fraction of the time.

contract management in SCM

2. Centralize supply chain contracts

If you want to gain oversight of all of your agreements, it’s essential to keep them accessible and well organized. However, it’s impossible to do this when you rely on manual practices, as your documents are often scattered in various locations. A contract management platform for procurement professionals will ensure that you can access all of your important files anytime and anywhere, making it easy to keep up with all of your company’s obligations.

3. Adhere to timelines and critical dates

One of the biggest downfalls of companies who rely on manual management is their increased likelihood of missing critical dates and falling behind schedule. This often leads to poor partner relationships, missed opportunities, and unproductive CLM practices. If you want to avoid these pitfalls, it’s essential to implement a platform with advanced notifications to remind you of upcoming deadlines and critical dates in your contract lifecycles. Plus, an automated platform will help you stay on schedule and adhere to your timeline as you can complete the various agreement stages in less time.

4. Identify and reduce risks

It’s unwise for your business to take risks that are unnecessary, especially if you cannot afford to do so. Contractual risks may stunt your business’s growth as you will have to play catch-up when you could have been reaping the benefits of a low-risk agreement. A robust management platform will give you insight into any risks involved in a deal so that you can reduce or avoid them. This ensures that your company will not incur costly fees or enter an arrangement full of disadvantages.

Additionally, you can gain oversight of your whole repository of agreements and see the entire risk your company is taking in its partnerships.

5. Monitor agreements’ performance

Having agreements with boosted performance levels will increase your company’s profits, improve partner relationships, and boost your productivity levels. With manual management practices, it’s extremely time-consuming to track the performance of your agreements, leaving many companies in the dark about their performance levels which often results in deals that don’t perform too well.

supply chain contract performance

When you implement technology-based contract management software, you can automate the process of performance monitoring, allowing you to analyze and identify weak points quickly and keep your agreements as beneficial as possible.

Importance of contract management in supply chain management

Even though contracts are a central component in the supply chain industry, procurement professionals often neglect to manage them properly and focus on other business operations instead. However, effective contract management and contract negotiation in supply chain management are critical. Not only will it improve your company’s productivity as a whole, but it will also increase your bottom line, give you an advantage over the competition who uses traditional methods, and reduce the chance of risk and liability in your deals. 

Using software for contract and risk management for supply chain management professionals

Implementing contract automation software is the best way to boost your procurement agreement performance. Technology-driven platforms give you various tools and features that you can use to improve your contract management and contract negotiation in supply chain management.

When you invest in an automated solution, you can utilize standardized templates, a cloud-based repository, performance tracking, and other tools to help you close deals that benefit your business quickly. Therefore, if you’re looking for a way to maximize the benefits of your procurement agreements, look no further than contract management software.

How useful was this post?

Click on a star to rate it!

Average rating 4 / 5. Vote count: 6

No votes so far! Be the first to rate this post.

Share this: