Contract Management Best Practices for Managing the Performance of Suppliers.

Contract Management

Best Practices for Managing the Performance of Suppliers

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Agenda

• Introduction• Workshop – Supplier Performance Management• Supplier Relationship Management – Context• Setting the Stage – So What do You Expect from your Suppliers?• Supplier Groups• Contract Management Risk Areas• Supplier Performance Management (SPM) Framework• Contract Management & Control Best Practices• Appendices

A. Roles & Responsibilities – ClientB. Roles & Responsibilities – SupplierC. Contract Management Document ChecklistD. Contract Management Risk AreasE. Measure Performance ChecklistF. Report Performance Checklist

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1. What do you expect from your suppliers?– Quantitative and qualitative expectations– “Innovation”– Link to your organization’s business goals

2. What are some of the typical challenges you face when attempting to measure, monitor & manage Supplier Performance, and

3. Describe what can be done to address these challenges?

Workshop – Supplier Performance Management

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Supplier Performance Management - Context

• Companies lose 3-10% of savings opportunities due to a lack of understanding of “Total Cost of Ownership” principles.

• Best-in-class organizations achieve significantly more savings through a clearly defined supplier performance management process.

• “Among Fortune 1000 companies, the average number of current contractual files is between 20,000 and 40,000, a 20% increase over the last 5 years”. (Institute for Supply Management).

• Best-in-class organizations are 43% more likely to hold contracts in a central repository and place almost 82% of their contracts in these repositories (Source: Aberdeen Research).

• Manufacturers that utilized supplier portals reported a new product introduction success rate of 94% (LNS Research).

• In a recent study, the top driver for improvements in the management of contracts is the pressure to better assess and mitigate risks.

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Setting the Stage – What do You Expect from your Suppliers?

The answer to this question starts with: What are your Business Objectives and how do these align with expectations of your supply base? So let’s start with an overarching Goal and Objective

GOAL• Develop a business relationship with the appropriate mix of suppliers

resulting in the delivery of maintenance goods and services at the lowest total cost of ownership

OBJECTIVE• To reduce the overall internal & external Total Cost of Ownership (TCO) of

maintenance supplies and services by X%

The next slide describes elements associated with TCO that can/should be reviewed to establish your objective.

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Setting the Stage – cont’d: Total Cost of Ownership (TCO) Considerations

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Setting the Stage – cont’d: Establishing the Objective(s)

Challenge your suppliers. You might become pleasantly surprised!

Objective Q1 Q2 Q3 Q4 Total Year

Reduce TCO costs by x%

Improve On-Time deliveries by x %

Improve Plant/ Equipment availability by x%

Reduce rejects/returns costs by x%

Reduce Warrant expense by x%

Reduce Ex-warranty expense by x%

Reduce planned annual shutdown by x days

Improve Contract compliance by x%

Customer satisfaction % improvement

Value-added Services

Continuous Improvement

NPI success rates

Other

Other

TABLE

STAKES

INNOVATION

Illustrative

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Supplier GroupsSupplier Group Description

Strategic •Provides unique or highly specialized goods and services that provide a competitive advantage for the Client• An important economic relationship with ClientRequires Executive approval from Client CXO before it can be initiated.

Major Critical • Provides products or services that are very important due to the degree of integration with core operations or their impact on the business;• A high degree of interaction with Client operational personnel on key decisions regarding reliability of operations;• An important economic relationship with Client.• They are in many cases, involved in Client’s operational process areas (as opposed to Infrastructure).

Key • Provides the majority of products or services in a particular commodity area; • Offering some added value services or unique goods or services, beyond supply, • An important economic relationship with Client. •They are in many cases involved in the Client’s infrastructure processes (as opposed to operational).

Merchant Any Supplier which provides a product or service to the Client for financial consideration

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Contract Management Risk Areas

Management• In-place contracts not managedNegotiating Contracts• Lack of professional negotiators• Lack of procurement involvementAuthorization• No legal review• Users signing contracts• No formal guidelines on who can approve

contracts

Contract Language• No planned updating of language in

contracts due to new technical/legal developments

Contract Development• Requirements inadequately defined:

Product, Service, Price, Discounts etc.• Multiple contracts with different vendors for

the same product• Inadequate evaluation of vendor capabilitiesOther• Lack of expertise for complex transactions• Wrong people on the team

Implementation• New process is worse from users

perspective

Control• Lack of central repository for contracts• Lack of clearly defined roles &

responsibilities related to contract management process

• Lack of formal Supplier Performance Management system

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Supplier Performance Management Framework

The Framework is a closed loop, 4 phase system:Measure, Monitor, Report and Manage. Its objective is to support continuous improvement & where necessary, corrective action.

Measure Monitor Report Manage

• Performance Indicators & Standards

• Indicator Weighting

• Targets & Objectives

• Contract Type (Strategic, Major Critical, Key, Merchant)

• Weekly/Monthly Review Meetings

• Projects (Major maintenance routines e.g. Planned outage, annual shutdown

• Performance Audits

• Budgets

• Performance Dashboards

• Monthly management reports

• Performance Management

• Escalating and/or expediting the process

• Meeting/Not Meeting

• Exemplary Status

• Rewards & Remedies

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Roles & Responsibilities - CLIENT

The formal responsibility for Supplier Performance is carried out primarily through the following roles (a) Relationship Manager, (b) Operational Champion or Category Manager or Trader (c) Portfolio Manager, (d) Buyer.

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Roles & Responsibilities - Suppliers

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SPM - Measure

In order to provide meaningful, ongoing feedback to suppliers, performance measures should be developed based on the following principles:

Measure

Monitor Report Manage

Principles of Performance Measurements Performance measures must be driven from business objectives and key success factors.

Suppliers must only be held accountable for those performance measures in their control.

Performance measures must be capable of providing timely feedback for change.

Information must be balanced between financial and non-financial performance measures.

There must be relatively few performance measures at any one time.

Information must be sustainable within the existing organization.

Performance measures must be consistently linked to activities and processes.

Performance measurements must contribute to continuous improvement initiatives.

Performance measurements must be linked to targets.

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SPM - Monitor

• Provides assurance that progress is being made in line with agreed timeframes and contract deliverables.

• Information provided by a third party or the contractor for monitoring purposes should be reviewed and audited, as necessary, to ensure its accuracy and reliability. It can also often be tested through consulting end-users regarding the goods and services they have received.

• While the broad arrangements for actual monitoring over the life of the contract should be set out in the contract itself, they may need further or more detailed explanation at contract start up or during the transition phase. The level and formality of any approach to monitoring needs to be governed by the complexity of the contract and/or the degree of risk involved.

• It’s important to focus monitoring activity on key deliverables; very detailed monitoring can be costly and can unduly shift the focus away from achieving contract outcomes. This means establishing priorities for what will be measured at specific time intervals.

Measure

Monitor

Report Manage

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SPM - Report

• Incorporate supplier performance reporting into regular management reporting arrangements.

• Provides assurance to senior management on the Company’s performance in this area, including its compliance with policy and reporting requirements.

• Formal review meetings held with Strategic and Major Critical Suppliers • Formal review meetings held with Key & Merchant Suppliers as needed • Monthly Supplier Performance Management Report to Senior Management Illustrative

Measure Monitor

Report

Manage

Supplier “A”

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SPM – ReportCalculating Supplier Performance Results

Performance results should be reported as a whole number and generally accepted rounding principles should be used (i.e. less than .5 rolls down to the closest whole number and .5 and up rolls up to the next whole number)

Metric Not Meeting<90%

Needs Improvement

90-93%

Meeting Satisfactorily

94-98%

Exceeding98-100%

Price

Quantity

Schedule

Quality

Service

Compliance to improvement Illu

strative

The development of performance indicators should be undertaken in a collaborative manner, taking into consideration opportunities to minimize the number of indicators & the burden associated with data collection & reporting.

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SPM - ReportCalculating Supplier Performance Results

The following table provides guidelines linking supplier performance to remedies and rewards

Performance Category Performance Management & RemediesNot Meeting May move through an expedited performance

management process and apply a contract remedy, up to and including, a contract termination

Needs Improvement Issue a performance improvement notice. Failure to improve may result in the application of contract remedies, up to but not including, contract termination

Satisfactory No performance management indicated. Contract manager may engage supplier in establishing future performance improvement targets/value-add activities

Exceeding Focus on maintaining excellence

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SPM - Manage

Analyze the contract and agree the contractor’s understanding of the contract:• Identify deliverables and how their achievement will be measured• Define timeframes, particularly any critical deadlines• Understand payment arrangements, including links between payments and

performance• Confirm agreement with the contractor, especially in relation to any sensitive

matters.

Gain an understanding of the background to the contract and the relationship that has been developed with the contractor:• Discuss the relationship that has developed with the contractor over the preceding

phases of the contracting cycle, and• Meet with the contractor, as necessary, to further develop the relationship and

address issues that may impinge on effective contract management.

Measure Monitor Report

Manage

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SPM – Manage (Cont’d)

Establish any required systems for monitoring and reporting, protocols for communication and recordkeeping arrangements:• Establish contract management or data collection systems or processes• Draw up a monitoring plan or checklist covering key timelines, critical deliverables

and• performance reporting priorities• Develop any procedures or protocols, and• Establish recordkeeping arrangements.

Brief team members or stakeholders• Set out meeting arrangements for the life of the contract• Confirm stakeholder involvement and their requirements for information

Measure Monitor Report

Manage

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Contract Management & Control Best Practices

1. Create Dynamic Contract Repositories that Reflect Operation Requirements

• Include escalation & de-escalation clauses & link these to market parameters like foreign exchange and commodity indices e.g. fuel price volatility

• Set a system of alerts & reminders for the specific escalator/de-escalator clauses linked to commodity or Forex indices

• Track & measure compliance & quantify the savings accrued from these contracts when possible

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2. Setting Supplier Performance Targets

i. Analyze baseline data and industry benchmarks. Consider the following:– Historical variances in performance across operations/business units – across time– Are the factors contributing to variation understood Factors resolved or will they

continue to impact performance? (oil prices, currency volatility, supplier financial stability, Iceland volcanic eruption = air transport constraints in Europe)

– Can they be influenced or modified?

ii. Identify environmental/local factors that may impact on future indicator results

iii. Establish performance targets based on i) & ii) above

iv. Review targets with relevant stakeholders. Solicit input.

v. Finalize targets for incorporation into a) contract documents & b) monitoring, audit & supplier review process.

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3. Define, Communicate & Manage to Specified Contract Metrics

• Link contracts to spend to establish performance metrics to remedies or incentives

• Establish benchmark parameters with regards to peers

• Communicate & get input from decision makers when determining parameters

• Track contract compliance and performance based on these parameters – at least monthly

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4. Institute Regular Contract Audits & Apply Learning to Create Opportunities

Increase visibility by developing the necessary infrastructure & organizational commitment to ensure contract compliance. In our experience, visibility needs to improve in the following areas:

1. Currency change & conversion2. Cost Amortization3. Volume discounts4. Buyer turnover 5. Clerical Errors 6. Are Value-Added services being defined and delivered?

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5. Standardize & Accelerate Contract Authoring by Maintaining a Contract Template and Clause Library.

Standard, well-defined templates for contract authoring lower compliance violations and other associated risks.

• Define mandatory/non mandatory clauses

• Develop templates based on geographies and categories

• Ensure continuous updates to all clauses & access to relevant stakeholders to modify & maintain templates

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6. Create a Standardized Workflow for Collaborative Authoring, Negotiation & Management of Contracts.

Workflow standardization is essential to reduce contract creation cycles

& ensures stakeholder improvement.• Create a standard workflow with set protocols and procedures (Most tier 1-

3 ERP systems have incorporated this as standard)• Define hierarchy for approval process• Ensure access to all necessary stakeholders during the contract authoring &

amendment process.

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7. Supplier Relations

• Properly routed communications with vendors (i.e. through the purchaser) during the active solicitation, monitoring and audit phases

• Frequent communication between contract manager & vendor pertaining to all aspects of the contract including issues, technical assistance and overall progress of the contract

• Dispute resolution or contract issue procedures are clearly defined and signed off on

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8. Risk Management

• Identify all potential risks • assess their likelihood and consequences. • Identify risk treatments for those risks where existing controls needs to be

supplemented. • Involve or consult people who have developed a similar contract. I• Involve people from different areas of interest, for example, end-users, the

contract management team, administrative staff and subject matter experts.• Early supplier involvement though the use of pre-solicitation conferences and

industry benchmarking are considered best practices.

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9. Time Management

• Schedule key dates and milestones• It can be useful in the monitoring of contract performance to diarize or maintain a

listing of all key dates and milestones. This information should be made available to all staff involved in managing the contract and to the contractor.

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10. Infrastructure

• Design and install a Supplier Portal• Use to solicit ideas for continuous improvement• Incent Suppliers to use it (supplier evaluations and gain sharing

arrangements)

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11. Supplier Days

• Use to share opportunities for continuous improvement, innovation and cross-regional sharing

• Appropriate for organizations with global organizations where procurement occurs on a regional basis

• Ensure non-competing suppliers’ attendance• Incorporate participation into Supplier Performance evaluation Framework

Contract Management Best Practices for Managing the Performance of Suppliers.

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