Where do contracts come into play with category management? In a complex supply chain, contracts are an integral piece of acquiring products and services in order to achieve business objectives.
Procurement teams are familiar with category management, which happens when an entity segments its spend amounts into areas that include related products.
This consolidation makes it easier for procurement to focus on opportunities to maximize efficiency. Category management could include splitting direct and indirect products and services or dissecting inventory based on vendor, type, volume, or value.
Whichever route procurement takes for category management, it will require procurement to negotiate with suppliers based on the company’s needs, budget, and future expectations.
So, where do contracts come into play with category management?
In a complex supply chain, contracts are integral to acquiring products and services required to achieve business objectives.
For example, in oil and gas exploration, large operators are tasked with acquiring equipment, well services, and specialized tools to complete their jobs. This requires tenders to be put together. Multiple service companies end up tasked with the responsibility of reviewing legal terms and drafting markups as an exception table or amendment.
Another example is companies that procure IT services and software. In this case, category managers are tasked with compiling terms from competing providers. Once a decision is made, the third-party paper is delivered to legal for review. Often, low-cost software flies under the radar but comes with high-risk terms that can go unnoticed.
A final example comes from the world of manufacturing. Whether a company manufactures cars or other consumer goods, it must increase due diligence around direct and indirect procurement to face the challenges of producing products that can be sold down to customers.
As we all know, manufacturing is facing significant challenges due to the supply chain. Streamlining procurement through contract management can help manufacturers stay efficient and ahead of the curve, even in these uncertain times.
No matter what industry they are working in, procurement teams worldwide face similar challenges when it comes to streamlining contracts. Here are the top 3 challenges companies currently face, along with our suggested solutions.
Whether a company is tasked with reviewing a template from the other side or issuing tenders for commoditized goods and services, it often faces challenges lining up the terms at the finish line before making a decision. This slow-down can significantly derail the company and keep it from achieving results as quickly as it would like.
Playbooks and historical precedent are critical for streamlining the contract review and decision process. Thus, companies should implement a strategy in which contract markups can automatically score the risks on both sides of the table.
This enables each side of the transaction to reach a consensus faster, speeding up the time between compiling exceptions and delivering results.
Terms need to be reviewed with diligence. Otherwise, the supply chain can quickly become a source of critical business losses, including the loss of cost savings opportunities. For example, payment terms of 45 days versus the standard 90 days can vastly impact a business's cash flow and cash balances during any given quarter.
For this, businesses need to implement playbooks that lookup key risks to reduce the burden of undergoing a long, detailed review process. They also should implement redline databases that can surface important precedent information.
Using integrated playbooks is particularly important when a customer or supplier enters their second or third negotiation across a region where certain concepts have already been negotiated. In addition, playbooks can keep operating procedures in check.
Legal and finance terms are, of course, essential to consider during any contract negotiations. However, they are not the only terms that require a company’s attention. Key business issues that could cost a company millions of dollars, such as warranty and equipment failure scenarios, are often embedded in these legal terms.
These obligations often surface after the contract has been signed. Thus, managing these obligations early will ensure that the appropriate terms have been summarized to reduce the risk of operational failures at scale.
It’s important to create an exception summary that outlines critical operational issues that could arise post signature before executing a contract. This summary should inform stakeholders of any risks that may not be apparent up front but could impact the business’s need for the goods and services outlined in the contract.
If your procurement team is looking for a better solution to contract management, DocJuris is here to help.
Book a demo to learn how our software can help you streamline your contract management and review process without sacrificing the quality or integrity of your contracts.
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