When the Contract is King

[From iSource Business, August 2001] In the $379 billion foodservice industry, the contract is king. The online auction and spot-buying options currently available on the Web are not for its players. A Burger King restaurant, for example, can't go week to week from supplier to supplier, shopping for the best deal on soft drink syrup or hamburger buns. Regular shipments at predetermined prices are a must.

But with contracts comes the complexity of special regulations, rebates, deviated pricing and volume discounts that are based on a dizzying mix of variables. Manufacturers, distributors and multi-unit restaurant chains dedicate untold hours and dollars to ensuring that all parties in their particular supply chains use current contracts that contain accurate pricing information. Out-of-date documents and human error can lead to big losses in a world in which every penny literally counts. For example, a 3 cent pricing error on meat rounds, when a restaurant chain purchases 2 million pounds of them in a year, can mean a loss of $60,000.

The paper-based nature of the contracts that govern relationships between the parties in the supply chain is a major part of the problem, says Robert Sala, president and CEO of Distribution Market Advantage Inc. (DMA). DMA is a sales and marketing company wholly owned by 15 independent shareholder distributors, including such industry leaders as Shamrock Foods, Metropolitan Provisions, Maine's Paper and Food Service, and Food Services of America. The company has annual sales of more than $900 million in the multi-unit operator segment.

All the paper faxes, letters, copies of e-mails that flows between a manufacturer's corporate headquarters and our distribution centers is not necessarily as accurate as it could be, Sala says. Addendums, for example, aren't necessarily sent to everyone as efficiently as they could be. There is no consistent, centralized way of knowing what a deal is between a manufacturer and the multi-unit operator. That leads to pricing inaccuracy.

What has long been needed, Sala says, is a central, secure and easily accessible repository for the contracts that govern the relationships between the parties. If such an animal existed, it would mean that authorized personnel in each link of the supply chain would be able to refer to an approved, consistently accurate and up-to-date document when making a decision about a given contract item. Sala says this is particularly important because of the incentive- and rebate-based nature of the governing agreements. It's important that a unit within a restaurant chain realize that not only can it get a price break if it orders one amount of product instead of another, but that it can also qualify for a rebate down the road if its yearly order totals hit the right target as outlined by that all-important contract. From the manufacturer's perspective, aggressive contract management is an effective way to increase sales.

Where's the Beef?

In this business, improving communication by eliminating the middleman is simply not an option; distributors are in place because they actually make the process of getting foodservice products from manufacturers to restaurants easier, rather than harder. Therefore, Sala says, it's critical that distributors be the ones to work at offering their customers the manufacturers, such as Tyson Foods Inc. and Sara Lee Corp.; and the multi-unit chains, such as Brinker International and Luby's Cafeterias optimized methods of managing the entire contract process.

Enter at DMA's request Portland, Maine-based I-many Inc., a software company with a history of contract and program management in the healthcare/pharmaceutical market. With the advent of e-commerce, I-many took its services and software and gave them an Internet spin, thus enabling such clients as Roche, Bayer and Glaxo Wellcome to transfer their contract management processes online via Web-based portals. With its core technologies and methodologies well-established, says I-many Executive Vice President Tim Curran, the company decided to branch out into the areas of consumer goods and the foodservice industry. The first step came in the form of a May 2000 contract with Procter & Gamble's Commercial Products Group. A separate partnership with DMA to develop a prototype foodservice industry portal was the next.

The two companies worked to have a pilot of the application service provider (ASP) method of electronic contract management online for certain DMA customers by the end of first quarter 2001. The final rollout, on an account by account basis, is projected over the ensuing 18 months. The I-many designed portal will be meshed with DMA's existing online Web-enabled order management and reporting system, e-Advantage. For maximum operating efficiencies, say both Sala and Curran, the key will be to coordinate the information housed in individual account computer systems with the new portal. Curran says Procter & Gamble expects to significantly reduce its contract management costs once it goes live with I-many's comprehensive electronic approach.

I think achieving the holy grail depends upon how much adoption there is industry-wide by manufacturers and distributors of I-many's software on the back end, or on how they adapt their in-house systems to cooperate with the portal, Sala says. It's been our experience that in order to make something like this work it's important that it be positioned as an industry-wide solution.

DMA is not in a dominant position in the industry, but our goal was to get something going with our customers that has the potential to be an industry-wide solution. Manufacturers can't work with five or six portals for the same kind of data. An added benefit to us will be that we'll be known as the one that started it first the one that added value.

As for I-many, a successful relationship with DMA will mean entering into a profitable marketplace, and then more business as usual. What we offer is a missing component in the B2B e-commerce space, says Curran. It's a chore to manage contracts, but contracts are the way commerce of this magnitude transacts.

Kristi Lamont Ellis is a freelance writer based in Birmingham, Ala.

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