Supply Chain Management Arrangements

Companies often need to obtain parts and accessories from a large and diverse group of vendors in order to manufacture and assemble their finished products.  If a company is in that situation it may choose to enter into a separate procurement relationship with each vendor; however, negotiation and management of a large number of contracts can be extremely time-consuming.  An alternative to this approach is to contract with a single vendor that will be responsible for purchasing all of the needed items from the original manufacturers and then reselling them to the company on mutually agreed pricing and payment terms (e.g., a fixed percentage above the price charged by the original manufacturers).  This type of arrangement will be operated under the terms and conditions set out in a supply chain management services agreement.  Such an agreement will cover all of the issues normally addressed in a long-term purchase and sale contract including forecasting requirements; fixtures and programs; change orders; ordering procedures; pricing and payment terms; shipment and acceptance procedures; warranties and indemnities; limitations on liability; dispute resolution; and term and termination.  In addition, the agreement should include confidentiality provisions given that the parties will exchange sensitive information regarding product specifications and forecasts.  One of the most important features of the agreement is the ability of the buyer to retain control over the quality of the partners and accessories through its ability to place conditions and limitations on the factories and vendors from which the seller can obtain the accessories.  Upon execution of this agreement the supplier may agree that it will initially use only certain listed vendors; however, the supplier is typically allowed to recommend consideration of other factories or vendors by producing a production sample that can be reviewed and hopefully approved for acceptance by the buyer and then added to the list that would be part of the agreement. The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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