Sunday, December 19, 2010


In negotiating contracts, in addition to the basic performance schedule and milestones which may be agreed upon, there are a number of other time frames included in a contract that must be agreed upon. For example:
  • Lead time for placement of orders.
  • Period for confirming orders or return of acknowledgment copy of the P.O.
  • Purchase period for the agreement.
  • Period prior to end of purchase period during which orders can be placed for delivery after the close of the agreement.
  • Notice period for an extension of the contract.
  • Extension periods.
  • Number of days before scheduled delivery when early delivery penalties apply.
  • Number of days after scheduled delivery when late delivery penalties apply.
  • Notice period required to reschedule individual orders.
  • Notice period required to cancel individual orders.
  • Notice period required to cancel the agreement.
  • Number of days late before you may cancel orders without liability.                               
  • Cure periods for breaches.
  • Inspection periods allowed prior to commencement of warranty.
  • Warranty periods.
  • Notice periods required prior to conducting audits and source inspection.
  • The Payment period.
  • Period for suppliers to pay on Buyers' debit memos.
  • Period for response, escalation of problems.
  • Period for warranty repair or replacement.
  • Warranty period for repairs.
  • Notice period for proposed product changes, end of life activity.             
  • Review and approval periods.
  • Spare parts and repair availability period.
  • Spare parts lead-time.
  • Period confidentiality information must be maintained as confidential.
  • What is the cure period for breaches?
  • What period of notice is required for termination for convenience?
  • What is the maximum acceptable force majeure period?

While many of these may seem relatively insignificant, each time period that you negotiate can impact your direct or indirect costs and some can drive investments in inventory. For example:
·       Longer lead-times may mean carrying a larger internal inventory to provide flexibility.
·       A longer period for spare parts or repairs usually means having to stock more spare parts inventory or it can mean a longer period that the item is unusable.
·       A longer period for responding to problems frequently means more problems and more cost.
·       Longer periods to cure breaches can mean the expense of dealing with a problem supplier will just last longer.

Prior to agreeing upon any time period, consider the impact that period would have.  I can remember a situation where a Buyer negotiated a price reduction. Rather than have it be implemented immediately they agreed to have it take effect on the beginning of the next calendar quarter. Based on the reduction and volume of purchases being made that one time frame, which may have seemed insignificant to the Buyer, cost almost $200,000. The time didn’t seem significant, the amount of the reduction wasn’t great, but when you calculated the impact of the volume of purchases during that period the cost was significant.

Consider advantages or cost to them of any alternatives. If it provides them with an advantage, use that to get concessions in other areas.

When creating a time period always be very clear what you intend. For example if you establish a term expressed in days, does if mean calendar days or business days? The difference in time may be significant. For business days, are they your business days or the Supplier’s?

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