CPSM Blog

Contract administration: from start to finish

This topic was discussed briefly  earlier  and here goes one more time. If you have worked for a few years in supply management you have literally lived through this topic. Naturally, this is a carry over from the old CPM exam and hence routine stuff that you need to be clear about. To start with you must ask three questions:

1. Manage your organization: What are we we as the buying organization supposed to do under the contract? Who is going to do it? Do they fully understand that we have signed with a supplier? More than potential legal problems no organization wants to be viewed as folks who do not keep promises or simply are inefficient and drop the ball between departments. For example, if your process involves a goods acceptance and quality report before payment - you should know exactly how this paperwork/computer work gets done. If you have negotiated a 2% disount for payment in 30 days you got to make sure that the payment does come through as contracted.If you need contract modifications, do them.
2. Manage the supplier: When large dollar volumes are involved and its service not goods you are buying - it's really important to spell out a statement of work (SOW) and articulate milestones,deliverables and quality expectations in consultation with the supplier and your user department. You have got together a great contract and now you want it to work for your organization and for your supplier on a "win-win" basis. In other words, don't stop thinking "win-win" at the negotiating stage, but think how your user department can succeed and spell out  the steps that the supplier needs to take and how the user would monitor success. Don't become hands off at this stage, remain in touch with the user department and supplier throught these large value service type contracts.
3. Conflict/dispute resolution: You want the contract to complete with great success and satisfaction all around and that's where the two above steps are supposed to help. But sometimes things don't work and you have to terminate the contract.  A mutual "for convenience" parting with the supplier  is desirable. Here the classic analogy is with the human marriage and divorce. The latter can become rather bitter and if you are a great supply manager, you should ideally be able to avoid it by working hard at the earlier steps.

Defining and measuring supply management department performance

In this section, the methodology of measuring supply management performance is discussed. The section starts with a discussion of expectations from supply management from top management. Ideally, the top management should have a measurement of supply management expectation consistent with the company's mission. For example. historically Southwest airlines had the mission of "THE low cost airline" and you'd expect that supply management would have a similar aim.However, the website has the following mission :"The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit". So if you lead the Southwest airline supply management you need to have a sense of the history and what is expected going forward. So along with "low cost" you are supposed to deliver "warmth, friendliness, individual pride, and Company Spirit. " You need to therefore make sure that you are able to measure the department's performance from the point of view of passengers, suppliers, individual department members- against the explicit website mission statement and the implied,historical low cost idea.

Once you articulate specific metrics of goals for the department,individuals users you need to measure how well you did. For example, if you want a 90% reliability of supply delivery date according to the delivery date in your  purchase order terms, you must have data that are able to show what the actual reliability number is. It's fine if you are at 85% in the first year and its great if you have 87% in the next year. In other words, the idea is to keep track of how well you are doing as per standard. So long as you are working towards the goal (85% moves to 87% in the second year against the target of 90%). it's fine. If you are short then you need to have a remedial action in place like giving suppliers more lead time that in turn must be supported by early requisition by the users. You don't need to beat every target , but you need to have an explicit plan and progress data as you keep trying to improve the metrics.

Administering the contract /purchase order

The contracting and negotiations component ends with the elements of managing the contract/PO. At this stage the supply manager needs to be involved in tracking and ensuring that the supplier does what is agreed to in the negotiated contract. It is not merely "checking on the supplier" but trying to see that the supplier is on board and is providing goods and services that meet the expectations of internal customers like say production and also external customers like say the Government who might be using the equipment supplied that has a critical component from the supplier under contract. Responsibilities at this stage also include the need to step in if costs of the supplier go out of control and a price adjustment becomes necessary. Also responsibility is pretty overall including the need to meet supplier's payment schedules as agreed in the contract. Finally the contract might need a "closeout" that is concluded or might need to be terminated for cause or convenience.

In other words "contracting and negotiation is a lot more than mere negotiations which is always the hottest seminar topic in supply manager training materials and events.