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• In the business world today, delivering the highest possible value from the supply chain depends a lot on the kind of supplier relationships an organization can maintain.
• Relationship management begins from vendor prequalification, to contracting, and eventually to performance and evaluation.
The contracting process is often a complex one and understandably so. Both parties need to anticipate any eventuality and agree on how to resolve it. Long contracts face risks such as price escalations, potential liquidity problems for the client, delivery problems for the vendor, equipment breakdowns, and other contingencies that could disrupt contract performance. That’s why supplier contract negotiation is important.
Conditions Necessary for Contract Performance
Effective contract performance requires that both parties fully understand their obligations as well as their rights in the contract. Rights and obligations are both legal and financial. The internal stakeholders of both parties must also be aware of the implications of the contract and decision-makers should sign off on it. During the life of the contract, both parties ought to be willing to resolve issues arising speedily and with good faith.
As a procurement manager, you must recognize that contracting is a process that starts with preparation, all the way to signing the contract documents. To ensure smooth performance, here are important things to consider.
The Importance of Research and Preparation
The contract you sign with a vendor should be the product or rigorous research. The contract should support your strategic goals and your team should have certain targets during the negotiations. You must be clear about your volume needs and how they change during the year. This is got from your historical data as well as projections. Your target prices for the item or service being procured should also be researched beforehand.
You should use past contracts with the same or other suppliers as guidelines during the negotiations. For instance, you may realize that placing bigger orders could result in price savings. Past contracts will also make you aware of contingencies based on experience.
Preparation involves putting together the right team to handle the negotiations. You need people who understand the technical bits of the contract, the finance team, and the legal department. The team should be well resourced so that the process happens fast enough without overlooking essential aspects of the negotiations.
Understand the Supplier
It’s important that your contract preparation and supplier contract negotiation team understands the supplier. You should know them beyond the prices they are offering. Do your companies have things in common, such as the cultural approach to negotiations? In international business, managers approach such engagements differently based on culture. When you know this, you will adjust your team’s strategy to avoid coming off the wrong way.
In addition, understanding the company’s financial position, history, product lines, and future plans is important. You might find useful information that helps you make concessions or other propositions to them as part of the negotiation process. Try and understand what they intend to achieve through the negotiation. This might help us to work out the contract more easily.
Remain Open to Alternatives
During the negotiations, the vendor may have propositions that your team may not have considered before. Your team should not be quick to turn such suggestions away, and in fact, the team needs to be briefed as such. Take time to consider the suggestions. If beneficial, table it before the relevant decision-making authority for a final verdict.
A lot of mutually agreeable pursuits are often a product of suggestions that arise during negotiations when teams realize they have converging goals. If there is a generally collaborative mindset on the part of the decision-making authorities, the technical and legal teams can sit together and work out the finer details of the contract.
Framework for Assessment
Procurement managers need to realize the need for a framework for the assessment of contract performance. Decide on the key performance indicators, that also need to be tied to your strategic objectives. By committing to the framework, you can always gauge whether your company faces the risk of vendor non-performance and then take corrective action.
Adopt Contract Management Best Practices
Your company should identify contract management best practices and deploy them during the contract process. Your company has undertaken other contracts in the past and undergone challenges. Can you draw any lessons from those experiences? That wealth of knowledge ought to be distilled into the present supplier contract negotiations.
One example of best practices is for the legal team to draft templates for contracts. These ƒFtemplates will contain certain terms and definitions so that they are applied in all company contracts. Having templates also speed up the contracting process. In fact, contract creation tools can integrate AI-powered risk analysis tools. These tools scan bulky contracts and give a risk score, with risky clauses being highlighted. They are quite useful when handling many arrangements within a short period of time.
There are digital tools for contract creation that allow members of a team to work together on the contract document. These tools have a repository where documents to be included in the contract, such as certificates, can be easily pulled and added to the contract.
Get the Right Tools
ProcurePort is the world’s leading provider of e-procurement tools. We have contract management, supplier management, as well as custom solutions to help you ease all of your procurement processes. Reach out to us for consultation on the right tools to help you manage supplier contract negotiations better.