For a relationship to thrive, both parties need to be aware of and comprehend their respective responsibilities. These duties should be outlined in clear terms and conditions.
Recall that the APICS Dictionary, 16th edition, defines terms and conditions as “all the provisions and agreements of a contract.
When creating a contract, it is essential to include clauses that outline the actions each party can take in case of unexpected events or failures. These clauses promote fair play and encourage the fulfillment of strategic goals. Don’t be swayed by the other party’s claim that an unfavorable clause is standard “boilerplate” legalese that won’t matter. If negotiations can’t produce a fair agreement, it’s better to walk away. Additionally, always have your legal representatives, particularly those with contract law expertise, review and approve any contract before signing it.
Please be aware that the hypothetical examples provided are meant to clarify contract concepts and should not be used as actual contract language. It is important to always seek the guidance of legal counsel when creating contracts.
Pricing
When accepting price quotes, it’s important to note that they may include more than just the price per unit. Packaging estimates and other details may also be included. Some contracts may have fixed processes with specific price increases allowed based on certain contingencies, such as an increase in raw materials (referred to as escalation). Other pricing contracts may specify that orders use current market prices.
Here’s an example: The pricing for the product is specified in Schedule B, while the prices for spare parts, accessories, and packaging are listed in Schedule C. The supplier is allowed to raise prices in Schedules B and C once every 12 months during the agreement period, but the increase should not go beyond 4%. Additionally, the supplier should give a written notice 3 months ahead of any price increase.
Delivery Requirements
This should specify dates, locations, and conditions such as how orders will be placed, how a product is to be protected during shipment, what modes of shipping are to be used, minimum or maximum orders, and the like.
Here’s an example: If the supplier fails to deliver the products as per the agreed delivery schedule, they are obligated to provide written notice to the purchaser outlining the reason(s) for the delay and their intended resolution. The products will only be delivered in accordance with the agreed delivery schedules.
Transfer of Ownership (Incoterms® Trade Terms)
Incoterms trade terms stated in the contract will affect when each party is responsible for the freight. This is required only for international transactions, although companies may also elect to use the terms for domestic freight.
Payment Terms
When negotiating payment terms with a supplier, it is crucial to take into account factors such as payment timing, method, and currency exchange. In order to minimize risk, it may be necessary to establish the exchange rate to be used in the contract or set a specific timeframe for utilizing a sample of exchange rates as a benchmark for currency exchange.
According to the agreement, the buyer must pay the supplier’s invoice within 30 days of receiving it. The payment should be made in Hong Kong dollars (HKD).
Performance Criterion
To ensure meeting the performance requirements, it is essential to specify the product or service’s attributes and determine which attributes hold more significance and why.
The supplier has agreed to produce the product by the ISO regulation certification requirements. As part of this agreement, the supplier will maintain all the necessary documentation to comply with the ISO regulations.
Quality Assurance
To ensure quality, it is crucial for organizations to outline their management process and performance standards clearly. This should entail detailing any specific standards suppliers must comply with or be registered under.
As an example, the supplier has agreed to allow the purchaser to conduct equality audits of the manufacturing facility upon request and with scheduling approval.
Order Requirements
This includes the standard delivery measurements, the desired quantities, and the order due date. The contract may specify the company’s order period, which is the time between placing an order and the availability of goods per the Incoterms trade terms. Purchase orders are also considered contracts with stated quantities and pricing confirmed by both parties.
Example: Deliverables and dates are as specified. Three days early or late is considered acceptable on-time delivery and used for supplier evaluation purposes.
Associated Incentives and Penalties
The contract should detail how an organization will provide business assistance and/or incentives to a supplier or help them to improve. Incentives may include contractual sharing of cost savings. Any penalties to be assessed when problems occur need to be communicated as well.
Example: Failure to deliver the product in accordance with delivery schedules and failure to resolve the issue within 30 days will give the purchaser the option to terminate the agreement, with written notice to the supplier.
Status Reporting
A successful partnership depends on good communication. Both parties must establish trust and confidence with each other so that an open exchange of information occurs. The contract should cover provisions for routine communication in terms of frequency and types (e.g., face-to-face meetings, online conferencing, electronic reports, hubs or dedicated workstations, intranet sites, blogs).
Example: The purchaser will establish an internet-enabled portal where employees and partners can post daily communication entries and notes to support collaborative planning, forecasting, and replenishment. Regular meetings will be held to review open orders, engineering changes, design issues, production issues, etc.