The Source-to-Contract Process | Mastering the Nonprofit Source-to-Pay Process - Part 3

In Part One of this series, we heard about how Katie researched extensively to seek a supplier who could deliver quality materials at the lowest possible price. She contacted several suppliers, compared quotes, and finally selected one that seemed promising. She made a choice that she thought was best but ultimately had to go a different direction when the supplier couldn’t meet her organization's needs on time.?

As Part Two of this series mentions, the Source-to-Contract process plays a crucial role in identifying sources of supply for goods and/or services needed by nonprofit organizations. It involves selecting the right supplier to achieve organizational goals and leveraging effective contracting strategies for mutually beneficial outcomes. I’ll share an overview of the process for this article, but in future articles, we’ll break down each step and other details further!

Identifying Sources of Supply?

When a nonprofit organization decides to procure goods and/or services based on its needs, the team must find suitable suppliers. They can utilize various resources such as incumbent suppliers (the one you already use), trade associations, trade press, exhibitions, business advisors, directories, recommendations, government-approved lists, market competitors, and other accessible sources.

Challenges:

1. The time-consuming process of finding and organizing potential sources of supply.
2. Difficulty in deviating from an embedded incumbent supplier during contract renewals.
3. Change management challenges when introducing new contracts alongside established relationships with other suppliers.

Recommendations:

1. Clearly understand the organization's needs and goals to find suppliers tailored to meet those requirements.
2. Utilize multiple sources to create a comprehensive list of potential suppliers.
3. Consult incumbent suppliers for their suggestions on competitors.
4. Proactively address change management through effective Management of Change (MOC) and Organizational Change Management (OCM) processes.

Selecting the Right Supplier?

Once a list of potential suppliers is compiled, the selection process begins. Additional information about each supplier can be obtained through online research, recommendations, or Request for Information (RFI) submissions. Two methods are discussed here to refine the list and make the final decision: Three Bids and a Buy, and Supplier Scorecards.

Three Bids and a Buy?

This method allows nonprofit professionals to identify three potential sources of supply, including the incumbent supplier. It helps determine the best source based on limited options, particularly in low-risk or lower-cost areas.

Supplier Scorecards?

For higher spend, new, or higher-risk areas, Supplier Scorecards offer a more comprehensive evaluation approach. Selection criteria aligned with the organization's mission and strategy should be defined.

Criteria for the scorecard can cover price, quality, on-time delivery, financial stability, long-term partnership potential, reliability, alignment with organizational philosophy, geographic support, transportation, travel costs, and more.

Limiting the number of suppliers to 3-10, unsuitable suppliers are eliminated based on minimum criteria. Other evaluators from the organization should participate in scoring the remaining suppliers. Additional interactions with suppliers may be necessary to clarify information obtained through RFIs or other requests.

Once clarifications are made, evaluators input their scores, and a weighted average is calculated to determine the supplier with the highest score, aligning with the organization's goals.

Challenges:

1. RFIs are time-consuming.
2. Completing scorecards diverts resources from critical work.
3. Resource constraints make the additional time investment seem burdensome, especially when incumbent suppliers can fulfill the job.
4. The time commitment feels costly when considering opportunity costs for other categories.

Recommendations:

1. Streamline the RFI and data gathering process using digital tools like a Vendor Management System (VMS).
2. Apply the appropriate selection method based on the category or need.
3. Invest more time upfront for strategic, new, or high-risk areas to prevent quality gaps and misalignment.
4. Identify backup suppliers in case the first choice is not available.
5. Ensure criteria align with organizational and project goals, not solely focused on price.

Leveraging Contracting Strategies for Win-Win Outcomes?

Once the supplier, and potential backup options, are identified, it is essential to employ the right contracting strategy to achieve mutually beneficial outcomes for both organizations.

Understand Strategy

Revisit the original goals of the organization regarding the sourcing or procurement event. Determine whether it is a strategic contract or transactional in nature. Assess alignment with Porter's Five Forces framework. It is crucial for the entire team to understand the strategy before entering negotiations.

Negotiate?

Negotiations typically begin with an initial quote obtained through a Request for Quote (RFQ) or Request for Proposal (RFP). This provides a baseline understanding of the supplier's stance on cost factors and may have influenced the selection process.

Before negotiations commence, clarify your organization's position on each negotiation point. Understand areas where compromise is possible and identify deal-breakers. Define the desired outcomes that drive value creation and aim for a win-win approach, rather than a win-lose scenario. Focus on building long-term partnerships and avoid strained relationships during the contract's lifespan.

Contract Drafts and Execution?

Once negotiations are concluded, and a win-win outcome is achieved, it is crucial to document the agreement in contract drafts. These drafts undergo legal review and alignment until both parties agree and execute the contract. Communicate the contractual terms and conditions to relevant stakeholders to ensure compliance.

Challenges:

1. Intimidation during negotiations.
2. Lack of clarity regarding company values beyond seeking the lowest cost supplier.
3. Lengthy contract execution process due to multiple revisions.
4. Misunderstanding of executed service contracts among field stakeholders, leading to audit issues.
5. Noncompliance with contracts due to informal agreements hinders the achievement of contractual goals.

Recommendations:

1. Seek negotiation training to foster win-win outcomes.
2. Collaborate with stakeholders to understand their needs, considering factors beyond cost, such as quality.
3. Engage with leadership to align with the company's overall goals and objectives.
4. Document negotiated agreements during negotiations and share an overview with participants to reduce rework during contract drafting.
5. Communicate the value of strategic partners to field stakeholders, highlighting the expected service levels.

By following these approaches and recommendations, nonprofit organizations can optimize their Source-to-Contract processes, ensuring the selection of suitable suppliers, fostering win-win outcomes through effective negotiations, and maximizing the value of their contractual agreements.

Looking Ahead

In future articles outside this initial series, I'll be sharing additional tools and resources that can help nonprofits in each of the steps of the Source-to-Contract sub-process, so stay tuned!

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See an index of all the articles in this introductory series below.

• Part 1: A Lesson From a New Executive Director's Journey
• Part 2: Introducing the Source-to-Pay Process
• Part 3: Source-to-Contract
• Part 4: Procure-to-Invoice
• Part 5: Invoice-to-Pay
• Part 6: Supplier Management (Coming Soon)