Procurement Training- Getting ready with Contract Management

C ONTRACT M ANAGEMENT
B USINESS S ERVICES S UPPORT T RAINING C OURSE
www.businessservicessupport.com

OBJECTIVES
PROVIDE PARTICIPANTS WITH SKILLS FOR EFFECTIVE
CONTRACT MANAGEMENT
PROVIDE A BASIS TO ENABLE THE ORGANSIATION TO
ACHIEVE STRATEGIC PROCUREMENT GOALS
PROVIDE PARTICIPANTS WITH AN INSIGHT TO THE LEGAL,
HUMAN & COMMERCIAL ISSUES ASSOCIATED WITH A
LEGALLY BINDING CONTRACT
PROVIDE PARTICIPANTS WITH STEPS FOR DESIGNING &
DEVELOPING ROBUST PERFORMANCE MANAGEMENT
SYSTEMS
2

COPYRIGHT© TO BUSINESS SERVICES SUPPORT LIMITED

2011

STRUCTURE & OUTLINE
Supplier performance is crucial to an organisation
A supplier that performs well can:


Help your organisation be more efficient



Produce higher quality products or services



Reduce costs, and increase profits

A supplier that performs poorly can:


Disrupt your operations



Make your organisation fail in the eyes of our customers



Increase your costs, and threaten your profits

Managing the performance of suppliers, then, should be a strategic focus
of every organisation
Yet, it is unbelievable how many organisations fail to recognise the
importance of supplier management
3


2011

STRUCTURE & OUTLINE
Very few companies have formalised systems in place to
measure their suppliers’ performance
And fewer companies have a strategy to motivate
suppliers to improve their performance
This course will teach you how to measure your
suppliers’ performance and how to achieve optimal
supplier performance
After this course, you will have enough knowledge to
implement a supplier measurement and management
program at your organisation
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2011

KEY OUTCOMES
CREATING AND DEVELOPING A TEAM CULTURE
LEGAL & COMMERCIAL AWARENESS
COMMUNICATIONS STRATEGY
NEGOTIATION SKILLS DURING THE PROCESS
ONGOING MONITORING OF PERFORMANCE
5


2011

PEOPLE IMPLICATIONS?
ROLE OF THE CONTRACT MANAGER:
Once a contract is awarded, the contract manager will agree
budgets and timescales, and gain approval of costs and processes.
Throughout the life of a project the contract manager will act as
the main point of contact.
 The exact nature of the work will depend on the size of the

employing organisation, but key processes would involve the
following:


Meet with clients to gain a full understanding of their business and
needs;



Present project proposals to client;



Maintain communications with in-house
departments and external contractors;



Make improvements to contract
processes and procedures

6


2011

LEGAL IMPLICATIONS?

7

COMMERCIAL VS LEGAL IMPLICATIONS:


There are literally thousands of different clauses that can be applied and
most are dependant on the type of contract



Contract clauses are usually small statements within the contract.




These clauses can work to the detriment of other statements made within the
contract and can be used to limit any liability or obligation on the part of the
person offering a service

In many contracts there are clauses known as penalty clauses
 These clauses are designed so that when a party breaches a

contract a financial penalty can be applied
 One of the main reasons behind this type of clause is that if a

contract is breached then the non breaching party will be able to
claim a financial penalty without taking the dispute to court

2011

WHY CONTRACT
MANAGEMENT?

8

Three Key Elements:


Measuring your suppliers’ performance involves implementing a supplier rating
program at your organisation



A supplier rating program can be simple or complex, manual or electronic. You
will need to decide the option that works well for you



We’ll call SUPPLIERS, RATERS, and PERFORMANCE measures the three key
elements of a supplier rating program



The suppliers, raters, and performance measures that you decide upon for your
supplier rating program are critical to the success of your program



We will talk about each of these three key elements now

Suppliers

Raters

Performance

Supplier
Rating
Program


2011

WHY CONTRACT
MANAGEMENT?
ELEMENT ONE: SUPPLIERS




When selecting the suppliers to evaluate, you have to determine a
reasonable number of suppliers

It is usually not worthwhile to evaluate suppliers who receive few orders
from you or with whom you do not spend a great deal of money


Whatever number of suppliers you choose, the group of chosen suppliers
should include:



(b) Those suppliers who have the most impact on your operations





(a) Those suppliers with whom you spend a lot of money

Determining what is meant by "suppliers with whom you spend a lot of money"
and "suppliers who have the most impact on your operations" is subjective and
can vary from organisation to organization

Here are some guidelines to help you determine the suppliers who
meet these criteria in your organisation
Suppliers

9

Raters

Performance

Supplier
Rating
Program


2011

WHY CONTRACT
MANAGEMENT?
ELEMENT ONE: HIGH SPEND SUPPLIERS


For spending, let’s default to the time-honoured 80-20 rule



As it would apply to suppliers, 80% of your spend is with 20% of your suppliers



Find out your total spend and the amount you spend with each supplier



Sort your list of suppliers from highest spend to lowest spend. Is the spend with the
supplier at the top of the list equal to or greater than 80% of your total spend?



If not, add the spend with the first supplier to the spend with the second supplier. Is
the sum equal to or greater than 80% of your total spend?



If not, add one supplier at a time (in order) until the combined spend is approximately
80%



Your supplier rating program should probably include these suppliers unless your
company does not follow this pattern and it takes more than 20% of your suppliers to
account for 80% of your spend

Suppliers

10

Raters

Performance

Supplier
Rating
Program


2011

WHY CONTRACT
MANAGEMENT?
ELEMENT ONE: HIGH IMPACT SUPPLIERS


For impact on operations, ask yourself the following questions
about each of your key suppliers:



If this supplier delivered late, would it shut my company’s
production line down?



If this supplier delivered late, would my company be unable to
meet its obligations to its customers or otherwise lose sales?



If this supplier provided a product or service that was of
unacceptable quality, would it shut my company’s production line
down?



If this supplier provided a product or service that was of
unacceptable quality, would it result in a failure of my company
to meet the quality standards of its customers?
Suppliers

11

Raters

Performance

Supplier
Rating
Program


2011

WHY CONTRACT
MANAGEMENT?
ELEMENT ONE: HIGH IMPACT SUPPLIERS (CONTINUED)


If this supplier raised prices, would my company continue to purchase the
same products or services from that supplier, resulting in a reduction of
profit?



If this supplier provided poor service (e.g., failure to promptly answer a
question), would it result in my company providing unacceptably poor
service to its customers (e.g., failing to promptly answer a customer’s
question)?



If you have answered "yes" to any of these questions for a supplier, that
supplier should be included in your supplier ratings program



After reviewing these questions, you probably get the idea for the type of
questions to ask about suppliers



Because you know your business better than any third party, feel free to
create your own type of questions to determine whether a supplier has a
significant impact on your operations
Suppliers

12

Raters

Performance

Supplier
Rating
Program


2011

REVIEW?

13


2011

WHY CONTRACT
MANAGEMENT?
ELEMENT TWO: RATERS


The next key element to decide upon is the raters – who are the
individuals who will participate in the evaluation of your suppliers?



Obviously, your organisation’s purchasing and supply management staff
should participate because that staff is ultimately responsible for the
performance of your suppliers



But do not stop there! It is extremely important to get the input of
other stakeholders in the organisation



If you work in a production environment, be sure to involve your
engineers and quality staff



These folks have a vested interest in the performance of your
company’s product or service and usually are more than happy to give
their opinions on how well suppliers support their goals

Suppliers

14

Raters

Performance

Supplier
Rating
Program


2011

FRAMEWORK FOR MANAGING
CONTRACTS (K.P.I’ S )
SUPPLIER SCORECARD:




The supplier scorecard approach gained popularity in the 1980’s



Each rater will receive one scorecard for each supplier being
evaluated



15

Supplier scorecards are a common starting point for
organisations who wish to have some method of rating their
suppliers

Each scorecard represents a survey of the rater’s opinion of that
supplier’s proficiency for the selected performance measures


2011

WORKING TOWARD IMPROVING
SUPPLIER RELATIONSHIPS
Working toward improving supplier relationships:


An example of these three points being formalised in the
resolution of a quality problem is:
a)
b)

By Monday of next week

c)

16

The supplier will have its production machinery recalibrated

That the supplier will test the first 10 components produced for
you prior to shipping to ensure that they function in accordance
with contractual tolerances


2011





17

If your efforts to correct performance problems through
collaboration fail, you should seek to replace your poorly
performing supplier with one who can meet your expectations
However, it is never safe to assume that switching suppliers
eliminates problems


2011





Always perform due diligence and ask prospective
replacement suppliers with evidence that they are better than
your incumbent



18

You may end up with the same or worse problems when
switching suppliers

Evidence can include customer testimonials, on-site
demonstrations, product samples, and so forth


2011

Procurement Training- Getting ready with Contract Management

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