Being able to manage contracts effectively is crucial to improving compliance when dealing with customers, partners, and vendors. By using the methods and theories of efficient contract management, businesses and brands can build stronger relationships with partners and create and maintain the value of their services.

What is Contract Management in Procurement?

If your business actively engages in acquiring goods and services, you are already likely drawing up procurement agreements. However, contract management in procurement particularly relates to the process of organizing and maintaining the contracts connected to these acquisitions. By doing so, your business can ensure compliance throughout its operations while also boosting productivity and value.

What are the Objectives of Contract Management in Procurement?

To Ensure the Product/Service is Sold at an Agreed-Upon Price

The terms of the contract a business signs with its vendors can be the core difference between a product remaining on shelves for years or slowly fading out. If a vendor signs an agreement with a distributor that prices their product too cheaply, they may find themselves losing money. On the other hand, a seller may also begin to struggle if the price of a product rises too sharply.

This need for a balance makes the importance of contract management in procurement plain to see. When both parties agree on the price, these concerns cease to exist, allowing both businesses to plan for the future.

To Assess Whether the Product/Service Conforms to Specified Quality Standards

Quality Assurance (QA) has become an integral part of the procurement contract management cycle. No business wants to feel tied down to a product they cannot sell because final consumers believe the quality is too poor. Fortunately, the procurement contract management process helps to ensure that the product or service matches the standard before any pen meets the dotted line.

quality assurance in procurement contract management

Before your business finalizes any deal with a partner, you may set a strict set of prequalification guidelines that your vendors must satisfy before receiving full payment. These requirements also allow all potential and future partners to understand the standards they must meet to increase their sales or sign substantial contracts.

To Ensure the Product/Service is Delivered Timely, At the Right Place, and Correct Quantity

One of the core issues that the procurement contract management process aims to tackle is efficient delivery. By setting out the principal details relating to distribution, your vendors can understand the conditions they must satisfy. If they fail to do so, you may find them in breach of the contract, which may put future deals at risk.

To Ensure that Vendor Management is Cost-Effective

Vendor management essentially involves the operations that allow an organization to carry out measures for reducing risk and controlling all costs related to sellers. Unfortunately, when your business starts dealing with multiple vendors, tracking this information can become challenging, leading to things quickly spiralling out of control.

Efficient contract management helps to keep the price of managing your partners as low as possible by introducing a unified vendor management system. This process keeps your team marching forward in the same direction, which helps in boosting productivity and reducing the amount of time spent on creating and tracking vendor contracts.

What are the Benefits of Contract Management in Procurement?

Improving Compliance

One of the core reasons businesses continue to improve their contract management process is compliance. These agreements help lay down the law you and your partners must follow. Should any party fail to do so, the legal implications are transparent in the terms and conditions.

procurement contract compliance

As legal battles between two companies always tend to be drawn-out and expensive experiences, all parties have a strong incentive to continue the terms and conditions of the contract.

Minimizing Risks

While procurement can be highly profitable, it also involves a significant amount of uncertainty. In some scenarios, your partner may increase the price of goods and services, leaving you with less free cash to help navigate your business. In other cases, you may face vendors who fail to meet up with their deliveries, leaving you with nothing to offer last-mile customers.

Fortunately, the contract management process in procurement helps your business by giving you all the tools you need to battle these risks. The operation allows you to set fixed prices in your contract to help fight off any fluctuations, as well as provide delivery conditions your vendors must follow. Additionally, this process aids in assuring the quality of all products that reach your door, making it an excellent tool for businesses.

Avoiding Complicated Contract Management Issues

As your business begins to deal with several vendors, you may reach a point where contract management becomes a hassle. Your team may spend several hours editing huge contracts during pre-signature, getting stuck in a back-and-forth with the counterparty. Meanwhile, the backlog of existing contracts may also start piling up, leaving your business jammed between a rock and a hard place. Naturally, contract management helps fix all these issues by offering your team a streamlined method for dealing with all parties.

Helping Manage and Update Renewal Dates

Once you and a partner approach the tail end of a contract, you may begin thinking about renewal. This phase presents an opportunity to negotiate new terms if your business finds itself in a stronger position. Contract renewals also act to maximize the relationships between you and your vendors.

procurement contract auto renewals

Unfortunately, many businesses struggle to navigate this phase properly due to poor contract management processes. In scenarios where the contract automatically renews, this may leave them lumbered with a terrible vendor for years to come. On the other hand, failing to resume the agreement at the set date may lead to your business losing the upper hand when renegotiating.

The contract management process aims to solve these issues by creating an effective way to track and maintain contracts. By using this process, your business will always be aware when a contract is about to expire or automatically renew, allowing you to make the most suitable action.

Improving Procurement Contract Audit Execution

Procurement auditing is an essential part of the purchasing cycle that generally involves reviewing various sections of all your existing contracts. By utilizing contract management, your business can gain an aerial view of various aspects of your business process, such as your spending performance, how streamlined your workflow is, the legitimacy of your invoices, and much more.

Final Thoughts

The importance of effective contract management in procurement cannot be overstated. This process allows your business to protect itself from several risks such as loss and compliance issues. By utilizing tools such as contract management software and applying various procurement systems, your business can remain ahead of any problems with vendors while also forging stronger bonds with partners.

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