How Contract Compliancy is the Key to Better Purchasing

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As a purchasing department, it is important to see the fruits of your labor, that the savings you have identified and captured are realized. Essentially, you want to know that the contracts you execute are ‘used’. This means contract compliance, easier said than done. The key ingredients are: A clear process Understanding across your organization […]

As a purchasing department, it is important to see the fruits of your labor, that the savings you have identified and captured are realized. Essentially, you want to know that the contracts you execute are ‘used’. This means contract compliance, easier said than done. The key ingredients are:

  • A clear process
  • Understanding across your organization
  • Responsibility accepted by the internal customers
  • Continuous improvement support.

Purchasing is a fascinating activity for many people in an organization. Almost everyone has an idea of what to buy with the company’s money. And as a purchasing professional, you understand that the larger the volume you buy from one supplier the higher the discount and/or better the service.

To convince your colleagues outside Purchasing to follow the implemented ordering processes and to order from the contracted suppliers, you need information. The key information needed to support contract compliance is the following:

  • Ordering process usage
  • Spend with contracted suppliers
  • Differences between contract prices and invoiced/ordered prices

The ordering process is designed for specific purposes and outcomes. For example, approval before ordering leads to lean and smooth invoice processing. Purchase to Pay process compliance is closely correlated with contract compliance. Within your ordering process, you embed the policy to order with contracted suppliers. In case your process compliance is low, you can be certain your contract compliance is even lower.

Define ’contract’ and a measurement method for contract compliance

Make sure you and the internal customers agree on what you call a contract. Decide on when you interpret an order (and the amount) as process and contract compliant and how you measure the compliance percentages. The internal customer must be included in this process and agree to the calculations and goals, because in the end they spend the money.

Responsibility at the right place

Inform, mobilize and support the people with the authorization to spend the money. Provide them with insight into their contribution to the contract compliance and advise them on how to improve their compliance results. With a procurement compliance policy agreed upon by the broad customer base, power to make changes is secured. Furthermore, contract compliance is only taken seriously if it becomes a KPI of the manager. “What gets measured gets done”.

Measuring for better results and better contracts

As a purchasing department, you want to serve and support the business in focusing on the core activities; serving customers, making profits or reducing costs. So, you execute contracts which your colleagues will use to order goods and services they need to support those activities. Monitoring contract compliance helps you to evaluate whether the content of the contracts fits the customer demand or can be improved. It can also show you where there are gaps in your contract portfolio, e.g. if in a spend category, the contract compliance is 0% or very low, you now have the information needed to start a project setup additional contracts to serve that customer base.

3 reasons why an organizations need to measure Procure to Pay compliance:

  • You need compliance measurement because the company expects procurement to be a steward of expenditures
  • You need compliance measurement to track whether agreements with your suppliers deliver the expected benefits following the execution of the contract
  • You need compliance measurement to improve the way supplier contracts address current and future demands of the business

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