Monday, December 13, 2010

What is a Contract

An agreement between two or more parties establishing an enforceable legal relationship,
  • Example: a Supplier agrees to sell a Product or Service to a Buyer and the Buyer agrees to pay for such product or service


An agreement between two or more parties creating an obligation to do or not to do a particular thing.
  • Example: In settlement of a claim the Buyer has against the Supplier, the Buyer and Supplier enter into a settlement agreement where the Supplier agrees to pay the Buyer a sum of money to resolve the claim and the Buyer agrees not to sue the Supplier on that claim.

Contract must meet 6 requirements
  • Offer
  • Acceptance
  • Legal Purpose and objective
  • Meeting of the Minds
  • Consideration
  • Competent Parties

A common form of offer is Buyer’s purchase order.

Offers must be clear. Any offer should answer the 4 W’s and 2 H’s. Who will do it, what will they do, where will the do it, when will they do it, how will they do it, and for how much.
  • Supplier shall deliver 100 widgets, part number XX0003, to Buyer FOB origin, Supplier’s Dock in Taipei, Taiwan on March 17, 2012 for US$25.00 per unit.

Offers must be Communicated to the other party.
  • Communication can be in writing, electronic or oral.

Offers must be expressed with the intent to enter into a contract.
  • For example a request for bid, quote or proposal by Buyer would not be considered to be showing the intent to enter into a contract.

In making an Offer you should provide a time by which the other party must accept it.

Offers will terminated by:
  1. Lapse of time allowed to accept the offer. If no time is stated, the offer terminates after a reasonable period of time has passed.
  2. Rejection by the other party will terminate the offer.
Offers may also be rescinded by the offering party.  To rescind an offer required that it be communicated prior to acceptance by the other party. You can rescind (withdraw) an offer orally, electronically, or in writing.
If you make an Offer and the other party proposes something different in response, you original offer will cease, but the proposal by the other part functions as a Counter Offer which you would need to accept to create an agreement. If you don’t accept their counter offer there is no agreement.


Acceptance may occur a number of ways.
  1. There can be communication by the other party of their acceptance.  When purchase orders were issued hard copy, there was an acceptance copy the Supplier would sign and return to the Buyer. With the advent of Electronic Data Interchange transmissions, acceptance is transmitted by an EDI signal.
  2. Acceptance may be by performance. Doing the specific actions that were requested by the offer.
Acceptances must be unconditional and any communication that would purport to change the terms of the offer is a counter offer.

If the Supplier hasn’t communicated their acceptance can you withdraw your offer ?
There are several situations where you can’t:
  1. If the offer is irrevocable.  For example if you asked the Supplier to provide a bid and required that you have sixty days to accept their bid. The Supplier’s bid would be an offer than they would not be able to revoke it within that sixty day period.
  2. When the Supplier has commenced the work and would be harmed by the withdrawing the offer. This is referred to detrimental reliance where since the other party acted in good faith and relied upon your offer to commence work and because there was detrimental reliance on their behalf you would be prevented from withdrawing your offer. This is called promissory estoppel.

Legal Purpose

The parties cannot contract to do something that’s illegal and if what they contracted to do subsequently became illegal the agreement would be voidable

Meeting of the Minds

Meeting of the minds occurs when the parties to a contract both have the same understanding of the terms of the agreement. The terms included on the face and attached to a Purchase Order or included in a written contract describe the meeting of the minds on the subject matter. Further most purchase agreements also include what’s called a merger clause that states that the agreement combines all prior understandings and represent the entire agreement or the parties intending to show that the agreement represents a meeting of the minds between the parties.


Consideration is the legal concept of value in connection with contracts. For a party to be obligated to provide you something or agree not to do something, you must agree to provide them something or agree not to do something. Consideration can be anything of value promised to the other party to induce them to enter into the contract. Consideration can be money, goods, services, rights, interests, benefits, promised actions, or withholding action. Consideration must exist in every contract for it to be enforceable and it must also exist in amendments to contracts for those amendments to be enforceable.

Competent Parties
A competent party is one that is:
  1. Mentally competent (capable of knowing what they are doing)
  2. Authorized to enter into the contract
  3. Of legal age
  4. Of normal mentality (not be impaired by injury, mental disease, or the influence of drugs or alcohol.
In a procurement setting the most important factor that could impact the enforceability of an agreement and whether the agreement was voidable is authority.  Whether the individuals signing the contract have the legal authority to bind their respective entities.

What is a Supply Chain?

It’s the description of all the activities that take place from being a raw material until its delivered to the end customer. For example, in building a computer it starts with the Supplier of raw materials that are used in making parts, assemblies or components that will be part of the computer. It includes a number of steps where value is added to that part, assembly or component. 

Here’s an example:
  • a semiconductor chip its starts with the production of the raw silicon,
  • it goes through a large number of steps /  processes to make a completed semiconductor die,
  • The semiconductor die then goes through a bond, and assembly process to package chip so it can be placed on a circuit board or other assembly
  • It is tested prior to making it available for shipment.
  • That chip could be purchased by an OEM, Contract Manufacture or Computer Manufacturer that will place it on a circuit card.
  • The CM will either use the card in a higher level assembly or ship the card to the Computer Manufacturer
  • If their final product is at the card level the OEM will either sell the product to the Computer Manufacturer or ship it to a manufacturing distribution center. If the card is part of an assembly the OEM will use it to produce their product that the ship to their customer or manufacturing distribution center. 
  • The Computer Manufacturer will either assemble that circuit card into the next level assembly or a completed product that is shipped to a distribution center or customer
  • The customer’s could be:
    • Another OEM that will use that product with their product.
    • A Value added reseller, that will take the product and add value to it for sale to a customer
    • A reseller or distributor
    • An end customer
  • For sales to everyone but the end customer, there could be additional steps in the Supply chain where value is provided to the product is transferred

From this you can see that the potential for cost exists in a number of areas. Every point in the supply chain where inventory is held there is a investment in inventory. Every time an item is transferred from one place to another there are shipping costs and risks of loss or damage. Inventory at all levels is subject to obsolescense, shelf life deterioration, loss or damage

The basic goals of Supply Chain management are to reduce cost and be more responsive. Cost is reduced by reducing the number of points in the supply chain which reduces both inventory and shipments. The shorter the supply chain you have, the more flexibility you should have and the more responsive you should be to the Customer.

Optimizing the supply chain may require:
  • Working with suppliers to eliminate bottlenecks;
  • Sourcing based on lowest landed cost versus price
  • Implementing JIT (Just In Time) or Supplier Managed Inventory techniques to optimize manufacturing flow;
  • Working with Supplier to establish warehouses and stocking hubs to serve you plants and locations
  • Alternative fulfillment models such as direct shipments to customers

There are six types of supply chain risks:
  • There are general supply risks such as supply and capacity constraints,
  • There are independent actions that can affect supply or the cost of supply such as currency fluctuation, changing delivery or import costs and political instability.
  • There are individual Supplier risks that include both there operational performance and financial health.
  • There are risk with changing laws
  • There can be source strategy risks, such as when custom products are used, when commodity products are not dual sourced or where the focus on cost drive you to unproven suppliers or higher risk locations.
  • Demand uncertainty or the inability to forcast accurately when combined with any combination of custom products, extended lead times, and lean inventory stocking level.

In the management of these risks its unrealistic to think that the Supplier can and will be able to manage all the risks. For example, a Supplier with money constraints simply isn’t going to build and stock custom product for the Buyer for the point that the Buyer may need it some time in the future. Another challenge of supply chains is the fact that many of the actual process times are fairly fixed. Sure you could have a semiconductor be processed in an expedited manner but that usually involves premium or expedite costs. Products with long Supply Chains can’t be turned off and on with the expectation that delivery will be instantaneous. The only way you can have instant delivery is by having inventory held. This means that to get the benefits out of managing the supply chain two things are key, effective  communication and the ability to accurately forcast demand. If you can’t or don’t do both things well and you don’t hold inventory, you’ll experience shortages, spend a huge amount of time trying to expedite delivery or wind up paying premiums to get materials from other sources which creates its own set of risks.    

What is Procurement?

Procurement is the process by which a company’s needs for products, software or services are contracted for and delivered:
1.     When needed;
2.     At the price and terms for those purchases that represent the best life cycle cost;
3.     With sharing of indirect costs and risks that are appropriate for the circumstances and leverage available to the negotiator at the time of negotiation.

Procurement is different from the practice of haggling over a price.  Hagglers negotiate many times only negotiate price. They don’t need to make the purchase and can wait to see if time and circumstances will change the Supplier’s need or desire to make the sale.  The vast majority of Procurement purchases are based upon the Buyer needing to make the purchase because internal demand is immediate or there is a problem the Buyer’s company needs to solve where delays will cost the company money.  
Each company organizes their Procurement function differently, but most companies will have:
·      Direct procurement for all materials where there is value added or transformation to be performed to make the product or perform the service.
·      Indirect procurement or MRO (Maintenance, repair, and operating supplies) supported all items that were required to support the non-production operations of the company
·      Services and General procurement who would manage services and goods to be used in operating the company
·      Repair Services procurement would normally purchase spare parts, repairs, maintenance of any Buyer sold equipment, training and subcontracted services required by the services operation.
·      Software procurement would manage the licensing of software for both internal, and
·      Specialized procurement operations such as those that focus on Capital Equipment (for companies that are highly process oriented) or Facilities where companies have a large number of facilities to support and maintain or expand operations

With the amount of outsourcing that has occurred over the last 25 years, the dynamics of what is being purchased has changed Procurement dramatically. More companies are relying on Suppliers to meet needs that the company once may have managed internally. With that increase in outsourcing, the nature of procurement documents has changed from making simple purchases that the company used to perform the work themselves (many times by Purchase Orders) to contracting with a Supplier to perform the entire operation (which frequently requires contracts.  Outsourcing has significantly and forever changed what’s referred to as “Procurement”.