Procurement and Contracts Management: Module 5

Welcome to module 5 of Procurement and Contracts management.

In previous modules we have covered an overview of supply chain effectiveness, we will now
focus on contracts and procurement management and how contracts and procurement fully
connect the supply chain. These are often called the glue that holds the supply chain together.

This is the most technical and detailed module so far and will have a reasonable amount of
contractual terminology related to how we assemble contracts and how we put contracts
together. Please remember that you can revisit this module at any time.

First we will start by discussing SRM, or supplier relationship management, and KPIs for
monitoring this.

We will also cover more general contractual agreements for supply, and finally INCOterms and
dispute resolution.

Slide 1

Let's start with the INCOterms; meaning the International Commercial Terms. This is the
terminology that's used more or less the world over and are the terms and abbreviations that
are used so you know what you're getting.

A good example is that you might be thinking that you're getting the whole item delivered to your
door; so CIP, Carriage and Insurance Paid to. If you have given the necessary details around
this, then if CIP is mentioned in the contract then you can reasonably expect this to happen.

Alternatively, it might be DAT, Delivered at Terminal so it might be at an airport and then you’ll
manage logistics from there. This is often a seaport in Dover or Folkestone that you're going to
collect it from. There is also DAP, delivered at a named place which works in much the same
way. If duty is a factor, this also need clarification. The term DPP, or delivered duty paid,
ensures that the supplier handles duty to the destination.

So far these have been unrelated to mode of transport, but there are specialist terms for freight
on the sea. You'll see here for example CIF, Cost, Insurance, and Freight which ensures those
costs are handled by the supplier to the port of delivery.

Slide 2
So INCOterms outline the responsibilities of both buyer and supplier, and span an enormous
number of eventualities.

We can map out the terms and which party is responsible. This allows us to clearly see the
designated party, and which terms may be beneficial to which side of the contract.

INCOterms are immensely useful for ensuring a standardised understanding of logistics and
removing uncertainty upon commencement of the contract. These are a useful shorthand during
the negotiating and contracting discussions to make sure everyone is on the same page and
understands who holds the risk, and when the risk is transferred.

Slide 3

In previous modules we have covered pricing and understanding cost in a reasonable amount of
detail. It is worth taking the time to do a short exercise before moving on to the intricacies of
contracts.

Think about something you manage or you buy. This should be a category that you have, or
goods or services that you manage in a business.

Try to build a pricing template. Think back to the total cost of ownership graph we looked at in
module 4, where we listed all the individual costs that went to make the pricing up. Delivery and
packaging, as well as the breakdown of all the goods and the labor.

Look at the pricing model and think about the method that you're using: are you using tenders or
quotes that have come back through an RFP or the supplier submissions.

Apply some of the templates, models, and approaches that we've used, and think about how
you would apply these to your chosen category.

Slide 4

Let’s look at what is typically included in the terms and conditions of the tendering process.
Suppliers like to get their own terms and conditions sent up front for the buyer to acknowledge
and abide by.

It's a strategy on their part, to send across favourable terms. Those will include payment terms,
who owns intellectual property, etc. As a buyer we want a say in those terms and conditions and
we want to heavily scrutinise them, or control the process of building the contractual terms and
conditions.
Slide 5

So let's investigate some of the formalities of contracting with a supplier. We need to be careful
about how we behave, the language we use, and our approaches when we're dealing with
potential suppliers. As we're in a procurement or a buying role, let's start at the bottom.

An invitation to tender, sometimes called an invitation to treat in legal terminology, is not a

formal offer. This is usually in the form of tender that you send out, you make that distinction
that this is not a formal offer and it's not meant to be binding. It's really just an invitation for a
supplier for a selling party to make you an offer to give you a proposal. So that's all it is; you're
not obliged just because they've given you a quote, you're not obliged to be under a formal
agreement to accept that, unless you move into a formal contract with them and sign that
contract.

During the formation of contracts, there are two broad things we should bare in mind.

One is to be aware of your duty to your company and also your engagement with suppliers.
Because suppliers will obviously use every opportunity to try to put you into a contractual
situation to have your business. Look at some of the laws and legislation, and be careful with
your wording when you are dealing with external suppliers.

The essentials of contractual law are that there's an offer and an acceptance. At the moment
we've not made an acceptance based on the fact that an invitation to treat is not a formal offer
and is not meant to be binding. It is an invitation to another party to make an offer.

We receive proposals, or offers and we haven't agreed on the consideration or our intention to
engage or contract with the supplier.

The final essential is consideration. This is essentially the price agreed upon. It is called
consideration here because not everybody uses money. There can be other benefits exchanged
in consideration for services. Sometimes it's a reciprocal agreement and that would be an
equally legally binding contract.

Slide 6

Let’s look at offers and what form they take. 99% are going to take a written form. There are
other ways an offer can be communicated, for example it can be verbal, or what they call
conduct meaning, how you behave. Largely however you're going to have or you're going to be
looking for a written offer.

The reason that verbal or conduct offers are not so definitive as a written offer is because
you've got something to refer back to in a written offer that you don't necessarily have between
two people over a coffee. it's very difficult to be able to pin that down that that was the verbal
offer that was made. So being written, you can be quite specific in the terms that are used and
what you're looking for.
Offers received will lapse after a reasonable period of time. A reasonable period of time is
debatable, but typically considered to be 30 or 90 days. This will typically be defined in the offer
itself to avoid ambiguity.

Offers can also be withdrawn at any time prior to acceptance. This may be because a mistake
has been found, or a situation has emerged where the offer needs to be revised.

The scope of offers can also vary. They can be made to a single organisation or individual, or to
a large group. If we look at large events, offers can be made to the public at large. An offer is
made to anybody who purchases a ticket with terms and conditions on it.

Now let’s look at acceptance of offers. Acceptance has a clear and unequivocal meaning. You
cannot accept an offer if you require amendments. This is because it must be accepted as
written, or another offer should be made. Of course the other party might not accept the
acceptance, particularly if it's got caveats on it.

A provision is essentially a counter, or amended offer. You’re provisioning a revision, or change

to the terms of the offer. Acceptance must be stated in writing. You can't assume the other party
has accepted or not. Silence is not something that can be assumed to be an offer or an
agreement with you.

Typically acceptances are made by email these days, however they can also be made by post.
Acceptance takes effect from when the letter is posted, or the email is written.

And finally, to clarify the term consideration. Consideration is usually in the form of money.
However, as we mentioned earlier, this can also be a reciprocal service that's being offered as
well. Typically when we see the term consideration in offers and contract, it is determining the
currency used.

Slide 7

Let's now discuss contract management.

We have gone through the tendering process, and have a legally binding contract which we
have used INCOterms to definitively outline what we will receive.

This contract is not a static document. We want this to be a living document which is of benefit
to the business on an ongoing basis. Contract management is the process of monitoring the
contract using things like key performance indicators, to make sure that we're getting the things
that we said and hoped to get from the relationship with this supplier. The contract should be
managed by somebody that can demonstrate through that contract, through the KPIs and the
service level agreement, that we're providing value for money.

Now there will be times when we report on aspects of a contract in a simplified way using a
RAG system. Red and Amber means things are not going well to varying degrees, whereas
green are going as well as expected. When they're red or when they're amber, we want to make
changes. We want to make changes to correct it and make it right. So contract management is
all about making sure that the contract is doing what it said it would do. And that the business is
moving towards the goals and objectives that we put in the business case.

We can also look at supplier relationship management which is usually used when you've got a
contract that you want to move towards a partnering relationship. Meaning it's highly complex,
and highly critical to your business. It's probably worth a lot of money as well. These situations
also carry hgh risk, so you want to make sure you're managing this in a methodical and
strategic way. This is contract management. Set tasks and actions are outlined and carried out
on a regular basis. But you also want some judgment. You want some business acumen,
commercial acumen, and acumen in the supply relationship management, largely around
partnerships.

The relationship should undergo ongoing continuous improvement, Supplier Relationship

Management should be proactive. It's making sure that you're focusing on the relationship, the
two parties, and getting the best out of both parties, for the benefit of both of them, under this
partnering and this collaboration agreement.

Slide 8

This diagram shows us, from left to right, how contract management could merge with supplier
relationship management.

This is moving towards a much more proactive, collaborative partnership relationship as we go

further forward with a supplier relationship.

When assessing suppliers and setting up the contract, we will likely have scored them on
people, how we're going to govern the contract, and we will perhaps detailed how we were
going to administer the contract. This may consist of a steering group to review progress
quarterly, or detail the specifics of storing KPI data in a contract database.

Going forward into delivery we will have set tasks. How and when we're going to pay the
supplier, how we're going to measure performance, the kind of risks we might put in a risk
register etc.
Then we move onto development, and we’re starting to think about the relationship, and how
changes are implemented. We are looking to develop this into kaizen, or continuous
improvement, all the way through to SRM. We are thinking about innovation, and thinking about
the macro economics that affect the company. So it's a much bigger and a much broader role
as we move towards SRM, and much more collaborative working in partnership with them.

We have now reached the end of Module 5. In the final module we will delve into the legal
aspects of the tendering process.