DC Velocity - Tip Sheet 2012

7Put contracts under the supply chain function. Purchasing and procurement teams often negotiate significant potential savings during the sourcing process but never fully realize those savings. The reasons for this vary, but they often include a failure to communicate contract terms to the affected organizations and a failure to monitor contract compliance.

All too often, in fact, the executed contract is filed
away in some drawer and forgotten. This is no exag-
geration; several years ago, the research firm Aberdeen
Group asked supply managers the following question
in a survey: “How do you manage your company’s
contracts?” Their answers were startling. Two-thirds of
the respondents stated, “We can’t even find the con-
tracts, much less manage them.”
More companies are moving responsibility for con-
tract management to the supply chain organization
rather than leaving it in purchasing, legal, finance, or
operations. One benefit of this shift is that it ensures
the contracts are collected and maintained in a central
repository. The migration of the contract management
function to the supply chain organization also allows
the supply chain leader to more effectively leverage the
company’s spend, particularly in the area of services,
where there is a great opportunity for cost reduction
and risk mitigation.

8Optimize company-owned inventory. Theglobal economic downturn means that more chief financial officers have put inventory on their radar screens, and their financial teams are constantly looking for new ways to improve the bottom line and reduce working capital. Supply chain organizations should therefore constantly review their inventory quantities and strive to keep them at an optimal level.

It’s no surprise that best-in-class companies are paying attention to inventory at the highest levels. The “real” cost of holding inventory often is higher than the generally assumed 20 to 25 percent. In fact, recent research reveals that inventory holding costs could represent up to 60 percent of the cost of an item that is held in inventory for 12 months. Those findings included the holding cost of insurance, taxes, obsolescence, and warehousing.