Q: What are the key elements of a good contract?
A: The contract has to meet the client’s needs not just in the short term, but also mid and long term objectives. Although competitive prices and quality are key to any good contract, there are many other factors that need to be considered. A Detailed set of terms and conditions of supply need to be included, which should detail: the contract term, delivery days and times, order cut-off times, non-performance clauses, termination clauses, price-hold periods combined with price review criteria, plus others.
When supporting clients in negotiating new supplier contracts, we always ensure that we include at least 90% of the value of products that a client may purchase. This will ensure that a client receives competitive prices for 90%+ of the products that they require, otherwise suppliers may increase their profit margin on the products excluded from the contract.
Q: How important is bottom-line cost here?
A: Clients who decide to go down the contract route generally do so to achieve the best value for their purchases – by doing so, it generates competition in the market place and discounts often come into play at that stage.
The longer the contract and the fewer the restrictions set within the contract, the best price they achieve. From our experience in the catering industry however it’s not just price that rules. Quality is very important and clients are not prepared to serve lower quality products in order to achieve more cost savings; this would be detrimental to their operation long-term.
This is where commodity procurement specialists can help: savings can be achieved by changing products without compromising quality. For example, advice is provided regarding changing pack sizes or swapping branded products to own-label of the same quality.
An NHS Foundation Trust client we work with was able to identify savings from changing the way they bought – instead of buying pre-cut fresh mushrooms, we advised them to buy a cutting machine and whole mushrooms. By doing so, the machine would have paid for itself in just two months and overall they would achieve 50% savings on the items, which add up over the course of a year.
It’s about having that detailed specialist procurement knowledge in each category.
Q: What else needs to be considered, other than price? How important are length of term, flexibility around pricing or market conditions, and issues such as CSR?
A: The length of the contract term is very important, as too short a contract will not allow suppliers to invest in the clients business, which will mean that the prices that customers pay will be higher. Too long a contract may allow suppliers to try to increase their margin in the latter years of the contract. An ideal contract term would really be between 2-3 years.
Food supply and prices are affected by many factors including; demand for the product, adverse weather conditions, changing dietary requirements, changing eating habits etc. This means that on occasions the supply of certain products may be limited, and prices may rise significantly. When this happens we will advise clients and offer alternative better value products where possible.
Having a contract in place is not just about price – it is also important to agree service levels relating to distribution, quality of products or services being procured, details relating to price-holds to ensure the client isn’t affected for sporadic price increases, plus it’s important to also consider Contract Price Management negotiations.
Clauses must be included in the contract to protect the client in case of product supply issues, for example if the supplier has not forecasted correctly and runs out of stock, a substitute product must be provided of the same (or better) quality, at the agreed contract price so not affecting the client’s bottom line.
In the catering sector, having flexibility in the contract is important as it allows the client to adjust their menus accordingly.
Q: How important is it that a contract incentivises both sides?
A: To achieve competitive prices for any contract, it is essential that it is attractive to suppliers but also meets the needs and objectives of the client. It is therefore important that the terms and conditions of supply, length of contract etc are fair and reasonable. This will create competition between suppliers who will be keen to bid for a client’s business.
Q: How well do buying organisations do this?
A: Some buying organisations favour some suppliers over others, which may not necessarily deliver the best contract for the customer, but may deliver the most income for the buying organisation.
For us, it’s about taking pride in delivering a professional purchasing service, by qualified purchasing professionals – ask whether your partner is CIPS qualified for example – and whether every supplier contract is awarded on the basis that it is the best fit for the client with no hidden supplier incentives.
It is important that a procurement partner is totally transparent and provides recommendations based on sound purchasing principles and practices which are fully auditable. As a result of providing impartial advice of this nature, it then allows clients to make informed decisions based on these recommendations.
Q: Is there still a tendency to try and get the lowest price and hammer the supplier?
A: Suppliers must view any contract as attractive and sustainable for the contract term to obtain the best possible value for the client. Although price is very important, there are many other factors that need to be considered to ensure that the client receives the quality and service that they require.
In order to achieve best value for any client, a professional tendering exercise is advisable. This will ensure that competition is created and the market is “tested” based upon an agreed set of terms and conditions of supply and an evaluation criteria against which supplier bids will be analysed. The tendering exercise will create a totally transparent auditable process that will achieve the best market price based upon the needs of the client.
Q: Is there a need to move away from process/input driven contracts and towards outcomes?
A: Absolutely; contracts should be created to meet the clients’ short, medium and long-term objectives with clearly defined measurements. When we work with clients, we look at spend, categories, required compliance, service levels, quality and so on. We then set systems in place to be able to track outcomes very clearly. Transparency is key and today there are cloud-based systems that help manage and track all details relating to supply chain, making it easier to monitor progress, spend and outcomes.
Q: What about negotiating the perfect contract in the catering industry? How do you cope with fluctuating ingredient/commodity prices / how can contracts reflect this?
A: Fluctuating ingredient/commodity prices can affect supplier prices. To ensure that clients receive consistent prices, we ensure price hold periods are included within the supplier’s contract. Typically these will be 3 months for fresh produce, as this allows customers to maintain prices stability on menus whilst also being able to take advantage of seasonal price variations (eg: buying English salad in the summer when prices are low and supply high) and 6 months for other food categories.
At the end of these price hold periods, Pelican will measure any price movements proposed by suppliers to ensure that they are fully justified. All price movements are measured and reviewed with the client regularly. We also limit price increases to an absolute minimum, challenge proposed increases versus market movements and intelligence that we have. Additionally, we negotiate new product listings with suppliers and, if needed, directly with the manufacturers.
About Martin Hudson, Head of Procurement at Pelican
Martin has worked at Pelican for over 10 years, leading the team of procurement experts as they manage the purchasing and supply chain requirements of our clients.
With over 15 years purchasing experience within the foodservice industry, FMCG and contract catering arena, Martin has vast experience and industry knowledge which is put to good use as he and his team deliver effective professional solutions to meet clients’ needs and objectives. His focus is to ensure that Pelican always works in the best interests of our clients through the provision of a professional purchasing service.
Established for 26 years, Pelican is a market-leading procurement specialist.
Pelican provides a wide range of purchasing services and cloud-based spend management systems that enable organisations to achieve considerable cost savings, improve their operational efficiencies and gain complete control and transparency over their finances.
Our solutions deliver significant benefits to organisations and transform the way businesses operate.
Key to our operating philosophy is that we are truly hands on in the delivery of procurement and management excellence, taking full responsibility for all client supply chain matters. Our CIPS qualified procurement experts engage with clients at all levels as they drive value for them in their businesses.