Source-to-Contract: How to Master the Process — Part 2
As mentioned in part 1 of this series, the Source-to-Contract process is key in finding sources of supply for goods and/or services that are needed by the organization, selecting the right supplier to achieve those desired goals, and leveraging the right contracting strategy to achieve a win-win outcome.
Finding sources of supply for goods and/or services that are needed by the organization
Once a decision is made to procure goods and/or services based on a need, Sourcing and Procurement must find suppliers to achieve the organization’s goals. Sourcing and Procurement professionals have access to multiple resources to get started on defining an initial list. Some of these resources include: incumbent suppliers, trade associations, trade press, exhibitions, business advisors, directories, recommendations, government approved lists, competitors in the market, and other sources in which your organization has access.
Pain Points:
- When sourcing new categories, it can be time consuming to find and organize a sufficient list of potential sources of supply.
- When contracts are up for renewal, it can be challenging to deviate from an embedded, incumbent supplier.
- When Field Personnel have built a relationship with a local supplier, change management can be difficult when bringing in a corporate contract.
Recommendations:
- Clearly understand the needs and goals for your organization. This can help find suppliers that are tailored to meet those needs.
- Leverage multiple sources to gather a list of potential suppliers.
- If you have an incumbent supplier, ask them who they would list as their competition.
- Work early to find key points that can assist with a change in source of supply related to your company’s Management of Change (MOC) and Organizational Change Management (OCM) processes. These are key processes that will make communication and change more effective and long-lasting.
Selecting the right supplier to achieve desired goals
After compiling a list of potential suppliers, the process of selecting the right supplier begins. Oftentimes, the first step is to gather additional details about each supplier to assist in the decision making process. Key information can be sourced from online research, recommendations, or through a Request for Information (RFI).
Once information about the suppliers has been gathered, there are a number of ways to refine the list of suppliers to make the final decision. Today, we will go just a little further into two such methods: Three Bids and a Buy and Supplier Scorecards.
Three Bids and a Buy
This informal procurement method allows Sourcing and Procurement professionals to find three potential sources of supply, often one being the incumbent supplier, and determine based on the limited options, which is the best source of supply.
This method is often used when trying to find the low cost provider in a category with lower risk or overall spend.
Supplier Scorecards
When evaluating higher spend, new, or higher risk categories, the Supplier Scorecard method provides a more complete picture during the supplier selection process. Based on the aligned sourcing and procurement strategy, selection criteria for the supplier scorecard should be defined.
Criteria for a supplier scorecard can fall into many categories. Some of these include: price, quality, on-time delivery, financial stability, long-term potential for partnership, reliability, alignment to company philosophy, geographic support, transportation, travel costs, etc.
Leveraging your aligned selection criteria and the responses from the RFI and other types of requests, the Scorecard can be completed. Each criteria should have a weighting that aligns to the value that that criteria has toward enabling the goal for the organization.
Limit the potential suppliers to between 3 and 10 by identifying which suppliers do not meet the minimum criteria and remove them from the process. With the final list of suppliers, include other evaluators from within the organization to score each criteria. Additional sessions with these suppliers may be necessary to further clarify answers from the RFI and other requests that can drive the evaluation process.
Once clarifications have been made, the evaluators should input their scores for each of the remaining suppliers. Based on a weighted average, the supplier to select to achieve the goals of the organization should have the highest score.
Pain Points:
- RFI’s take too much time.
- Completing the scorecard pulls resources away from the other critical work.
- The current pandemic has put further constraints on our resources. The additional time to do these processes doesn’t feel worth it when we have incumbent suppliers in other categories that can perform the job.
- The time committed to these activities feels like they would have a high opportunity cost for my categories.
Recommendations:
- Leverage digital methods to streamlining your RFI and data gathering process. Solutions, such as Ariba, can help to make this process easier on Sourcing and Procurement Professionals.
- Apply the right method of selection based on the strategy for that category or need. Not all sourcing events should use the same method.
- When strategic, new, or high risk sourcing needs arise, the additional investment in time upfront can reduce frustration, quality gaps, and misalignment on the backend.
- It is always wise to know which backup suppliers would be selected in the event the first choice may not be realized.
- Price is not always the highest weighted criteria. Ensure your criteria aligns with organization and project goals.
Leveraging the right contracting strategy to achieve a win-win outcome
So now that you have the supplier, and one or more backup options, make sure you apply the right contracting strategy to achieve a win-win outcome for both organizations.
Understand Strategy
Go back to the original goals of the organization regarding this sourcing or procurement event. Is this a strategic contract or is it transactional in nature? How do the organizations align on Porter’s Five Forces? Based on these and other details, ensure everyone on the team understands the strategy before the negotiation.
Negotiate
Often, negotiations start with an initial quote. This quote typically comes from a Request for Quote (RFQ) or Request for Proposal (RFP). This gives the organization a baseline understanding of where the supplier stands on key cost factors. This information may also have been used during the selection process.
Before beginning a negotiation, know your organization’s position on each negotiation point. Where is your organization able to compromise? What are deal breakers for your organization that would cause the deal to dissolve? What are the necessary outcomes for your organization to drive toward value creation and a win-win for both sides? The goal of negotiations should not be a “win-lose” approach where one organization plays “hard-ball” on all areas within the negotiation. This doesn’t lend toward long-term partnership and causes strain during the life of the contract. Drive toward the “win-win” where both organizations are able to achieve what is important to them or reach an appropriate compromise creating value for the supply chain as a whole.
Contract Drafts and Execution
Once negotiations have concluded and a win-win outcome has been achieved, it is time to put everything on paper. This consists of draft contracts between both parties seeking legal review and alignment until both parties agree and the contract is executed. Communication of the contractual terms and conditions to impacted stakeholders is important to ensure that the terms of the contract are upheld.
Pain Points:
- Negotiations are intimidating.
- I’m not sure what my company values outside of having the “lowest cost” source of supply.
- Getting to an executed contract takes so long with the number of revisions required.
- Executed contracts for services aren’t understood by stakeholders in the field. Audit has a field day when reviewing what has actually been paid out.
- Handshake deals override what our contracts say and causes us to not meet contractual goals.
Recommendations:
- Invest in negotiations training for your sourcing and procurement professionals that drives toward win-win outcomes.
- Work with the stakeholders of the sourcing or procurement event to understand their needs up front. If quality is of the utmost importance, then that should be considered or weighted higher.
- Work with sourcing and procurement leadership within your organization to understand the company’s goals and objectives for the project or event. Also seek to understand the company’s goals as a whole.
- During negotiation, be sure to document what was agreed. Leverage a note taker and provide an overview of each negotiated area before ending the session. This can reduce rework and frustration during the contract drafting process.
- Leverage a Supplier Management System that systematically applies contractual terms and conditions to reduce contract leakage. One such system, Track, can help to reduce contract leakage by 10%.
- Communicate the value of strategic partners to the field and the service levels that they can expect.
See an index of all the articles in this series below.
