Effective supplier management reduces contract risks
Contracts always involve risks, many of which relate to contractual partners, such as suppliers. With successful contract and supplier management, an organization can proactively identify contract risks and develop a strategy for managing the risk.
Digital contract management creates a foundation for effective and successful supplier collaboration, which improves the relationship between contracting parties and their chosen suppliers. Supplier management in turn enables better drafted contracts, reduces risks and costs, and improves efficiency.
Read more about contract management in our articles Digital contract management – what are the benefits? and Digital contract management makes it easier to locate and access contract data.
What is supplier management?
Supplier management refers to the evaluation, selection, management, and instruction of goods suppliers and service providers. Supplier management also involves monitoring the fulfilment of contractual terms and the agreed service level during the contract period, along with the development of supplier relationships.
Good supplier management helps you to select the right suppliers and partners, and to provide clear supplier guidance. Supplier management is relevant and vital throughout a contract’s entire life cycle, from negotiations to expiration, and encourages collaboration, which helps to achieve the objectives set out in the contract.
What are the benefits of supplier relationship management?
Managing supplier relationships aims at utilizing supplier relationships to create value and profitability for an organization.
When done correctly, supplier relationship management can
- reduce risks
- enhance supplier performance
- lower costs
- increase administrative efficiency
- make the selection of new suppliers more efficient.
Developing supplier management also involves fine-tuning supplier agreements. High-quality contracts are a good starting point for successful supplier management. Investment in supplier management and contracts can, in the best-case scenario, create financial advantages and boost the performance of the entire organization.
Contract risk management and supplier collaboration
Supplier collaboration includes the review of supplier performance during the contract period. Parties can then work together to solve any challenges that may have arisen during the review, which improves visibility, helps recognise areas that require attention, and reduces contract-related risks.
Supplier-related contract risks include, for example, a partner’s financial problems, a lack of necessary permits and certificates, delivery issues and poor supplier performance.
Supplier relationship management provides companies with the opportunity to monitor suppliers and collect important information required for checking supplier data, identifying any supplier risks, and monitoring performance. Information obtained from monitoring performance also warns of any upcoming issues and makes it easier to identify areas that require improvement.
Using successful contract and supplier management, an organization can proactively identify and manage any contract risks that may affect e.g. the supplier’s service, product delivery or the fulfilment of other contractual obligations.
Better contracts with supplier management
Both contract and supplier management contribute to the contract creation process and its development. The information produced can be utilized to get even more benefit out of future contracts.
Below we have listed seven benefits that you can achieve through collaboration on contract and supplier management.
- Ensure that contractual terms are fulfilled
Contract and supplier management can be used to ensure that all contractual terms, whether financial, social, environmental, or employment-related, are met and fulfilled.
- More productive relationships with partners
It is easier to develop and manage transparent and productive relationships with partners, and to extract cost and efficiency benefits through their expertise. If performance weakens, plans for improvement can be readily implemented.
- Identify and manage contract risks
It helps to identify and proactively manage risks relating to factors such as delivery of the supplier’s product or service, meeting general key performance indicators and complying with service level agreements, or the fulfilment of other contractual obligations.
- Clear definition of responsibilities
Digital systems make it possible to define roles and responsibilities more clearly. All parties can understand, see, and monitor their responsibilities in real time.
- More for your money
Supplier and contract management enables the continuous development and improvement of processes, which makes it possible for a company to get more out of their contracts. Strong supplier relationships also help to negotiate better prices, discounts, delivery costs, and bulk discounts. Correspondingly, buyers and suppliers can also collaborate on the length of a contract period, terms of payment and ancillary fees, as well as other incentives that help to increase profit margins.
- Turn hidden costs into savings
Better visibility means that hidden costs are easier to identify and convert into cost savings.
- Monitor performance during the contract period
Contract and supplier management also provide advantages for monitoring performance. Systems can be used to monitor, manage, and continuously develop the suppliers’ and the organizations’ contract-related activities. Benefits can be gained from implementing the contract, monitoring suppliers, and developing supplier relationships.
Together with contract management, supplier management can improve efficiency. It enables better collaboration with suppliers, which in turn makes it easier to achieve the objectives set out in contracts.
Invest in supplier management as well as contract management
In addition to contract management, investment in supplier collaboration makes it possible to achieve strategic goals and to monitor objectives throughout the contract’s entire life cycle. Digital systems offer unique solutions for developing collaboration and achieving shared outcomes.
If your organization has already invested in digital contract management, the next step should be towards developing supplier collaboration. As these activities are strongly interconnected, optimal benefits can be found when both applications are used in tandem.
Download our Guide to a digital contract management system to learn more about digital contract management. You can also learn more about how Cloudia’s services help to build trust between suppliers and buyers.