Performing supplier contract “health checks” can help retailers increase revenue, improve processes and enhance GNFR supplier relationships

Major retailers operate in a complex, constantly changing environment, with thousands of suppliers and millions of transactions – and an ever-changing web of logistical challenges involved with suppliers who keep everything moving.

As such, it’s difficult to constantly monitor whether each goods not for resale (GNFR) supplier contract is being executed properly, especially when employees are already juggling dozens of balls at once. And, because tremendous amounts of time and effort go into negotiating supplier contracts, regular check-ins and verifications to ensure contracts are carried out as intended may not happen. Analysing these contracts can be a strong governance tool – particularly when retailers lack the budget or bandwidth to independently and consistently analyse each supplier’s contract.

A self-funding GNFR contract compliance audit programme enables retailers to overcome these challenges and recoup a percentage of profit loss. At the same time, such a programme can identify systemic issues to mitigate future loss and enhance supplier relationships.

The following describes four ways retailers can secure maximum value from a self-funding GNFR contract compliance programme.

Start from the top

Use top-down programme alignment to define internal objectives for the programme and communicate this with senior management throughout the organisation. This includes clearly defining programme objectives followed by communicating them at every level to expand support beyond procurement.

It’s crucial to build strong governance, reporting and escalation processes into the programme so all parties are fully informed before settlement actions are taken. Educate stakeholders that while auditors expect to find errors, their focus is to develop a plan for realising future savings.

Having alignment with senior leadership, organisation-wide, is the most effective management model, which helps realize the full potential of a contract compliance audit.

Select a programme manager

The programme is much more likely to be successful when it’s overseen by a programme manager who has sufficient bandwidth to conduct the audit effectively. If internal bandwidth is lacking, consider selecting an embedded professional programme manager from an audit partner to handle day-to-day project management. 

From day one, the audit team should be in close contact with the programme lead and report any roadblocks early. If an auditor identifies a systemic issue like ambiguous contract language, communicating that broadly can help ensure the adoption of corrective actions as the programme grows.

Set clear expectations with suppliers

Embrace transparency by setting clear audit guidelines and expectations with suppliers to promote cooperation and faster claims processing. At the same time, be sensitive to the concerns of key suppliers by reassuring them of the programme objectives. It’s important that suppliers do not view the audit as being done out of mistrust.

In fact, make sure they understand a GNFR contract compliance audit merely aims to ensure what was agreed by both parties is reflected in invoices. Let suppliers know that the audit is about embedding best practices, not investigating wrongdoing.

By positioning it as a health check that can identify gaps or misunderstandings in contract language, or areas where both parties can benefit from process changes, a contract compliance audit can actually strengthen the retailer-supplier relationship.

Embrace change in contract audit methodology

Today’s contract compliance audits apply a methodology for reviewing supplier relationships to verify they are in line with what’s been negotiated in contracts, including change orders and related documents.

Traditional audits focus on high-risk suppliers that sit in a category with a lot of spend, have complex contracts, or where prior known issues have been identified. In these cases, the audit focuses on drilling down into each supplier’s billing practice.

The market is now demanding audits with more robust methodologies that shift the focus from reactive to preventive. They deliver everything a traditional audit does but aim to create sustainable value by rooting out the causes of profit leakage and improving supplier relationships.

The potential value of a full, robust contract audit methodology is much higher than what historical recoveries alone can deliver. And increasingly, retailers are implementing self-funding audit programs, which simply means the budget for the process is reimbursed with cash recouped from recovered claims.

For instance, recoveries can accumulate in a central audit reserve, which acts as a joint investment between a retailer and its audit partner – ensuring both parties have a vested interest in success.

Using a self-funding project model to support a more robust audit methodology can provide budget flexibility and shift the focus of audits from retrospective to the future. Profit leakage is stopped before it happens, and relationships with suppliers run more smoothly.

Recover profit, improve supplier relationships

The phrase “You don’t know what you don’t know” rings true for retailers lacking a self-funding GNFR contract compliance audit programme. But those embracing one, particularly when selecting an experienced audit partner to do the heavy lifting, soon find out that money slips through the cracks when supplier contracts are left unchecked.

But once an audit takes place, and hundreds of thousands – even millions – of lost profit is recovered, these retailers benefit in the long run with more revenue in their pocket, improved processes going forward and strengthened supplier relationships to boot.

To find out more about PRGX and the services they provide to the retail industry, click here.

This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.