An attorney once told me that you don’t really need a contract unless you plan to sue someone. That doesn’t sound like the basis for a good relationship to me.
In my prior life as VP, Operations for a rapidly growing manufacturer, we had an active supplier partner program with between 150 and 200 suppliers. We had a contract with only one supplier, and that was because their bank required it to help back up their line of credit. For the rest of our suppliers, we had terms and conditions on the purchase order as well as what we called a purchase accord.
The purchase accord was simply an agreement between the two of us (I suppose you could call it a contract) that spelled out our mutual expectations. We told the supplier that we would provide them with forecasts and purchase orders and how much of the forecast we would commit to. The supplier told us that they would ship to us in the quantities we requested with a specified lead-time. We also agreed on payment terms and quality and conformance standards. The document was typically two pages long.
When we first started talking to a new supplier and presented the purchase accord idea, their reactions were a combination of surprise and delight. Taking this approach was unusual for the suppliers and many often said they wished their other customers were as partnership-oriented as we were
Partnerships start with a foundation of trust and communication. Accountability for performance certainly needs to be maintained, but with close communication, issues can typically be resolved long before any legal action would need to take place. Starting on the right foot goes a long way in that direction. No fuss, No muss.
© 2013 – Rick Pay – All Rights Reserved
In my last post I discussed pre-transaction costs. Today let’s look at the transaction itself- and what might happen afterward, including the real costs of holding inventory – from a total cost of ownership perspective.
Now it’s time to actually buy the part. In addition to the part price, PO and order placement, you’ll factor in pipeline costs like transportation, customs, inventory, receiving, quality and inspection, return of parts – if the parts are bad, are you going to send them all the way back to China? Who is accountable for them? – scrap, order-related issue resolution, and payment.
These are the big costs. Line fall-out; quality on the line; defective rejects before shipping; field failures; repair and replacement; repair parts; materials disposal; obsolescence; and the cost of holding inventory, which I calculate for all my clients and is usually 27-36% annually, but in some cases can be over 50%.
If you can get 90 days of inventory for a 5% discount, should you take it? No, because it will cost you 6 to 9% to hold it for 90 days. This is why it’s worth taking a close look at the cost of holding inventory when you’re setting up lot sizes for your buys, because when you’re buying off-shore, lot sizes tend to be fairly large. For this reason companies like HP require at least a 25% part to part cost reduction in order to go off-shore, because all these considerations can really add up, not to mention needing fast turns, stability, and the capability to manage quality at the end site.
© Rick Pay, 2011 – All rights reserved
Many companies tell me they don’t use Blanket Purchase Orders (BPOs) because they fear it creates a major commitment with the supplier. This doesn’t have to be the case.
A Blanket Purchase Order is usually set up to cover the purchase of one or more items from a supplier over a long period of time, usually one year. It specifies terms, conditions and price. BPOs often come into play when the supplier relationship is based on Kanban, Vendor Managed Inventory or other auto-replenishment systems where normal POs would be inadequate.
Why Are Buyers Reluctant?
The apparent stumbling block is that BPOs typically specify a total quantity for the entire purchasing period. Many buyers fear that the quantity is a firm commitment to purchase, and if business doesn’t go as planned, they will have to buy all of the remaining parts on the BPO. This is simply not true; as with most terms and conditions, it is negotiable.
Building a Relationship
BPOs are what I call relationship POs. One of the large benefits is that they forecast a quantity for the year so that the supplier can plan production or buying activities. This can significantly cut costs for the issuer of the BPO. In my experience, any commitment can be limited to the materials lead time for the supplier, usually 30 days or less.
Removing the Fear of Commitment
BPOs have many advantages including better pricing, lower transaction costs, fewer transactions to keep track of, and closer relationships between customer and supplier. Removing the pressure of an annual commitment makes it easier to reap these rewards.
© 2011 – Rick Pay – All Rights Reserved