Those who are responsible for purchasing products and services in restaurants, casinos, and universities understand the importance of contract negotiation and the cost savings that can occur when one takes the time to research options before signing on the dotted line. According to a report published by the Aberdeen Group, the benefits of contract management include improved compliance by 55 percent, improved rebate/discount management by 25 percent, and reducing material and service costs by 2 to 7 percent.
Let’s take a look at the importance of these contractual agreements and how to ensure you’re using them appropriately.
The Benefits and Pitfalls of Contracts
Having a contract on items or services means that your business can only purchase these products from a specific supplier. The benefit is that a price has been negotiated and will be in effect for the duration of the contract. This can lead to reduced costs as well as consistent pricing which makes managing food and other product costs much easier. The downside is that, for the specific items, there is no more comparative shopping for the duration of the contract and purchasers cannot take advantage of any special pricing that may be offered during this time frame.
There is a definite art to the negotiating of contracts and determining the best cost-saving strategy. It’s important to know your numbers and understand which negotiated agreements are working for your company and which ones are best left unrenewed. Here, then, are the five top considerations to keep in mind when it’s time to renew your contracts.
The first step in the renewal process is to review your existing purchases and determine which ones are covered by a contract and those that are not. From this point, you can go into the negotiations with targeted goals in mind including which items you may want to extend coverage to and which ones you may want to remove. Don’t forget private-label items you may be purchasing that can often come at a higher cost than a branded product included in a contract.
Once you’ve reviewed your purchases, it’s time to research the all-important pricing strategy and determine if you’re able to reduce spending on necessary purchases. Price negotiation is an art, so be sure you’re confident in your abilities, or have people on your team that understand the process. This includes researching other suppliers for price comparison and understanding the market and what future analytics suggest regarding specific items.
Do markets suggest pork prices will be on the decline due to oversupply or are the shortages in other parts of the world affecting the U.S. market? Know your products and be sure you’re comparing apples to apples.
Flexibility is key when it comes to payment terms as shorter terms typically result in a reduced mark-up on products. The challenge lies in determining savings versus the benefits of delaying payments. Some agreements offer a payment schedule within a certain timeframe, such as 30 days, with an incentive clause that reduces the mark-up should the business pay in less time, such as 14 days.
Purchasing in quantity is one of the keys to reducing costs. Large multi-unit restaurants, casinos and universities often have a leading cost-cutting edge due to their size and the massive purchases that these businesses require. It’s possible to increase these savings even more by combining contracts, thereby increasing expenditures with one supplier. Of course, this also puts one at risk should a supplier fail or get pushed out of a certain market. Due diligence requires looking into suppliers and only choosing those with a solid, stable background.
Its important that someone in your organization go through all contracts with a fine-tooth comb when it’s time to renew and do it in a timely fashion. Some contracts contain automatic renewal provisions which makes changing vendors costly. These types of stipulations require a company to cancel their contracts a specified number of months before they expire or they are automatically renewed. Other contracts offer a right to terminate the agreement within a specified time frame, such as 60-days’ notice. These are ideal but may not afford you the necessary cost savings that a longer contract without an opt out provision offers.
Contract Renewal Reports
As is evident, renewing a contract is often time-consuming and associated with a tremendous amount of responsibility that has long-term effects on the profitability of any business. In order to help you achieve your financial goals, Buyer’s Edge offers contract renewal reports that a company can run when a contract is up for negotiation. It includes the quantity and costs of purchases covered by a contract as well as a detailed list of what a business is purchasing but doesn’t have on contract, including private-label items.
For those restaurants, universities, or casinos that prefer handling contract negotiations through established professionals in the field, Buyer’s Edge offers services that include direct negotiating on contracts, researching and executing requests for proposals (RFPs), and contract compliance. We also track the savings associated with individual contracts in order to quantify the impact of these agreements.