Successful Sourcing and Contracting Amid Disruption
The COVID-19 pandemic has thrown organizations across the supply chain into a state of uncertainty. As the initial shock wears off, there’s an opportunity to prepare your organization for success as the world stabilizes and organizations prepare for what comes next.
With today’s environment in mind, there are three primary objectives related to sourcing and contracting:
- Cost savings
- Supply chain risk
- Cash flow
Results from meeting these objectives will strengthen your financial position and ensure your organization not only survives but is positioned for growth. A systematic approach can be used to find and prioritize which suppliers and contracts to focus on.
Before starting, know your own organization’s priorities and current operating environment. Take into consideration whether there are locations that have closed, what your current staffing levels are and any changes in your operating plans for the remainder of the year.
First, analyze your expenditures. Look at spend by supplier using payables data for the past 12-18 months. This range will include suppliers who may only invoice once per year. Each supplier can be categorized by the type of good or service they provide. If master data is lacking, use the general ledger code where most of the invoices are applied as a starting point.
Identify critical suppliers and categories
Once a spend analysis and categorization is complete, step back and assess the supply base. Identify your critical suppliers and critical categories of spend. The suppliers most critical to your organization will vary significantly by industry.
Another dimension includes supplier performance and risk. Often, the organization knows which suppliers are easy to work with and which are not. There also may be categories that are prone to risk of overcharge.
Category risk should also be considered. A sole source provider in a critical category should be examined carefully. The COVID-19 crisis has impacted all industries and organizations to some degree; if your supplier is at risk and it’s difficult to change providers, this should be addressed quickly.
This effort sets up a priority list of suppliers and contracts to investigate more deeply. Start systematically reviewing each contract with a focus on:
Variable and fixed cost components
Other key commercial terms
Legal terms focusing on risk exposure
Prioritize and set goals
Each item can be assigned a priority and a goal for negotiation. When prioritizing what to address, we recommend considering:
- Overcharges. Services that are based on variable costs have a greater risk of overcharges. During a crisis, there may be a greater risk of overcharges and opportunity for cost savings. Consider reduced or stressed staffing, which may impact the effectiveness of the supplier’s billing function and your organization’s accounts payable function. For instance, the supplier’s stressed management and billing function may result in improper charges and non-compliance with terms and conditions. Conversely, your stressed accounts payable function may not identify these overcharges and non-compliance. It is critical that you ensure internal controls are in place and operating effectively to prevent or detect overcharges due to errors or potential fraud.
- Price or commercial term negotiation. During a crisis like COVID-19, many of your suppliers are also being greatly impacted by a decreased demand for goods and services. This may provide your organization with the opportunity to renegotiate terms and conditions, such as pricing and payment terms.
- Usage negotiation. Contracts that assume a certain level of business may not be applicable during the shut-down period. Identify the costs that relate to doing a higher volume of business and work with the supplier to negotiate based on your projections through the shut down and during the ramp up time period. For example, contracts for services such as streaming content may not be needed for locations that are currently shut down.
Negotiate or audit
Negotiating with your supply base can be partnership oriented. Use the insight and objectives you established using the framework above to determine the best approach.
These circumstances also provide a great opportunity to utilize internal reviews or audits to identify potential overcharges and cost savings. Some areas of review may include:
- Compliance with contract terms
- Appropriateness of labor, material, equipment, insurance, taxes, markups and other charges
- Adequacy, accuracy and completeness of support for hours/services billed
- Duplicate and/or inappropriate charges
- Integrity, accuracy and appropriateness of subcontractor invoices
- Appropriateness of retainage (if any)
All industries were impacted by the COVID-19 pandemic in some way. Use this time to evaluate your existing spend and supplier relationships. Identify opportunities to save costs for immediate bottom line results and look for potential audit reviews to ensure the partnership is equal and appropriate.
To learn how we can help your organization assess your current vendor and supplier relationships, complete our free assessment here.
For questions about sourcing and contracting as you navigate the uncertainties of the COVID-19 crisis, please contact Amy Julian, Director, Advisory Services, at email@example.com or Keenan McKinney, Manager, Advisory Services, at firstname.lastname@example.org.