Vendor Contracts Management.

Industry: Infrastructure

Overview – The efficiency and effectiveness of Sourcing & Procurement can be improved by establishing and managing ‘Contract Agreements’ with Vendors. In the emerging world the major Corporations already has taken step ahead, established and sustaining their Procurement System in proactive manner through Decentralized Ordering System instead of reactive manner i.e. enquiry floating and order placement upon receipt of approved purchase requisition by the Corporate Procurement Cell.

Rate Contracts – Commonly known word in Indian Market, RC and ARC etc. is Finalizing the price for the specific time period for the selected goods. In this Rate Contracting process the Buyer would get benefited when the price is probability of hiking in future where the vendor would acquire and keep the stocks in their location, in the flip-side the vendor would get befitted when the market price fallen down for the rate contracted goods. 

Risk with Rate Contracts – The major probability of risk is that Supplier Failure continue the supplies when the market (their sourcing) price got hike from the contracted with Buying Organization, in the Flip-side the buyer may not (honor) place orders to the rate contracted vendors when the price got fallen down from contracted with Vendor. Ultimately the project / production operations may get halt due to insufficiency or non availability of material in hand (Store). Subsequently, the buying organization is need to bear the on-time delivery risk of finished products (unless approved alternative source) to their customers in addition to consequential (Penalty from Client, Consequential Losses, Machinery and Labour Idle Cost), legal risk and company image/brand reputation in the eyes of respective client/customers. At the edge of war the supplier may only win for supplies to buying organization. Why? because the buying organization may not (aware) continues watching on the market price fluctuations, where the probability of seller is proficient in watching demand and supply flow along with price for the material which they are dealing. 

Vendor Relationship Management Failures – With the RC (Rate Contract) the identified benefits are short term and the determined risk to both parties would ends with untrustworthy of binding on contracted obligations due to non availability of price fluctuation clauses. Which may leads to failure for on-timely delivery and adjusting price fluctuations. In the current era the Buyer and Seller relationship is crucial and backbone to the buying organization, which is drastically changed from old myth customer is king. 

Solutions to overcome the Risk : – The buying organization can overcome the process of harnessing and sustaining stronger relationship with existing / newly adopted vendors through the below steps

• Obtain and consolidate annual tentative requirement from multiple projects for the selected category of Material.
• Identify and determine pre-qualified vendors from the market.
• Send an RFP with Price Fluctuation Clause & Selection Criteria to pre-qualified vendors.
• Conduct Reverse Auctions, Negotiate and Finalize the Contract with Multiple Source (Vendors) 
• Draft with Price Adjustment Clause, Validate and Issue the Contract Agreement(s) to Selected Vendors and Obtain their Acknowledgement.
• Decentralize the Order Placement Process for better Inventory Management
• Automate the Invoice Verification/Matching and Accounts Payable with minimal human intervention
• Manage Price Functions in Vendor Contracts and Sustain Ethical Relationship

Possible Category of Goods:- Depends on Organization and Process Maturity Level.

Exceptions – Seasonable Goods and other related goods.