Getting the Most Out of Your Suppliers
No matter which industry a business operates in, the level of service provided by suppliers is key to a company’s performance and bottom line. However, it is easy to overlook the management of long-term supplier contracts, in particular in relation to the supply of goods and services which are secondary to the core activities of the business.
Contracts with suppliers for items such as reprographic, postal, courier, taxi and travel services are rarely at the forefront of management’s agenda, particularly where such contracts have been in place for a number of years. Without management oversight, changes in business practice and technology can leave companies losing value as a result of outdated specifications, high prices and poor service.
Case Study 1: Staffing
A recent forensic audit of a supplier contract for mailroom services identified that staff numbers specified in the contract were no longer appropriate. Staffing levels peaked in the morning and evening to deal with mail delivery and collection. With vast reductions in recent years in the volume of business correspondence sent by post and an increase in courier deliveries throughout the day, the shift patterns did not reflect the needs of the business. However, under the terms of the contract the supplier maintained the specified staffing levels, at the expense of the company, in order to comply with the contract and meet its Key Performance Indicators (KPIs).
Further performance issues identified relate to the treatment of incoming packages. The mailroom contract required all incoming items to be X-rayed but this could not be complied with due to the large volume of incoming items, lack of trained staff and inadequate equipment. This was of key concern to the business due to perceived increased threats to security.
Case Study 2: Machinery Fit For Purpose
A similar review of a contract for reprographic services identified that specifications for printers and copiers no longer met the needs of the business. For example, the units provided and copy prices were based on the assumption that the majority of printing would be mono, whereas in fact most printing was color, resulting in very high copy prices and frequent breakdowns of overused color machines with mono machines sitting idle.
Case Study 3: KPIs and Monitoring Performance
Contracts that allow suppliers to meet their KPIs, entitling them to additional fees despite inadequate performance, are also not uncommon. In one case, this was due to the KPIs not reflecting the needs and priorities of the business. For example, a key KPI in a contract for reprographic services specified that an engineer would attend a reported printer fault within 24 hours, but not the period within which the machine should be fixed, resulting in lengthy repair times.
We have also seen instances where mechanisms under a contract to allow management to monitor performance have not been utilized (e.g. regular meetings with the supplier and audit rights of reported performance data). As a result, management was unaware of many of the performance issues until staff complaints were escalated.
Case Study 4: Supplier Costs
Control of supplier costs can also be difficult where supplier invoices are approved by finance staff who often have no oversight of reported performance and complaints, typically the remit of facilities management. As a result, any financial penalties entitled to under the contract may not be recovered.
Case Study 5: Fraud
Supplier contracts can also be subject to fraud or corruption. For example, a contract for the purchase and management of advertising space specified the range of profits that could be earned by the supplier and that any volume discounts and rebates earned had to be passed back to the company. The supplier sub-contracted the delivery of the contract to a wholly-owned subsidiary and retained the excess profits and rebates within the group. This was only remedied following a tip-off and a forensic audit of the contract.
What You Can Do
Regular reviews of long term supplier contracts are highly recommended in order to ensure optimal service at competitive rates. Duff & Phelps tailors our forensic audits to address specific issues raised by our clients, but generally recommend the following steps to manage your long term supplier relationships:
Where problems do arise, a forensic audit can be used to quickly identify the key issues and required resolution. A report from an independent third party is a useful tool to use as a basis for renegotiation of a contract and for internal use to improve management of the contract.