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.
Procuring quality goods and services at the best price is no easy task—yet some have become so established and developed at this process that they are considered experts in their field—procurement professionals.
In addition to the basic reports that these experts turn to on a daily basis, such as sales, inventory and food costs, there are targeted reports geared to increase their knowledge base and give them the data they require to make exceptional cost-saving decisions. Successful managers of large casinos, universities and multi-unit restaurants turn to these five reports to help manage their procurement process.
Price Range Reports
As the name implies, this report reveals the different prices your multiple units are paying for the same item. With a quick glance, you will be able to determine what items and areas require more in-depth price comparisons, what vendors may be over-pricing their goods, and where contracts need to be implemented. This information gives those in the gaming, hospitality, and education foodservice industries the information that leads to managed vendor contracts and cost savings.
Commodity Market Pricing Report
Tracking food commodities is one of the key elements in creating profits as well as a menu that can be sustained. It only takes one extreme weather occurrence or a widespread disease to diminish supply and send costs soaring.
A commodity price index is a weighted average of commodity prices. This includes products such as eggs, dairy, seafood, meats, and produce. Tracking these trends helps operators to anticipate future costs.
An example of this is the current outlook for livestock and several factors around the globe that will impact consumers and purchasers in the U.S. The Market Outlook summary for July 2019 reveals a decline in beef imports due to weather-related herd reduction in Oceania. Pork imports will also be affected due to the continuing effects produced by the African Swine Fever in China and increasing global demand amidst a thinning supply. Lamb imports, however, are expected to remain steady in 2020. Good information to know when setting up your procurement process and menu for the coming year.
The USDA releases these market reports on a weekly basis which helps with future planning as well as current price comparisons.
Analyzing purchasing data is at the root of soliciting competitive quotes and managing and awarding contracts. Purchasing data allows operators to view data from multiple-units simultaneously and offers the ability to analyze contracts from a “bird’s eye view.” A good purchase report allows buyers to configure data based on vendors, locations, or categories. It also offers the ability to view pricing over time with a specific manufacturer.
In the end, this detailed report will help procurement professionals determine which items could be better purchased in contract form or possibly switched out for better pricing or quality with a different vendor.
Contract Renewal Reports
This leads us to the Contract Renewal Report—a report that comes up whenever a contract is expiring. By reviewing this information, operators can determine what changes need to be established, if renegotiation is in order, or if its time to solicit quotes from additional vendors.
At Buyer’s Edge Purchasing, our Contract Renewal Report includes a detailed list of purchases that are not contracted as well as purchases that are covered by a contract. This gives operators the opportunity to have a visual on what products they might want to consider obtaining bids on and ensures they are receiving everything that the contract stipulates.
Price Trend Report
This report allows procurement professionals to see what items have impacted their spending. Trend analysis helps purchasers determine both strengths in their procurement processes as well as gaps that need to be addressed.
In Toast’s 2019 Restaurant Success Report, out of 1,000-plus restaurateurs that were surveyed, over 50 percent said high operating and food costs were their top challenge. Keeping an eye on your data through trends, graphics and reports gives casinos, restaurants, and universities the best opportunity at developing a successful procurement process.
Targeting your costs is crucial in creating a profitable establishment. Find the reports that work for your place of business that show what’s selling, what isn’t, and at what price point profit begins.