Monday, February 21, 2011

Negotiation - Thoughts on Negotiating Delivery And Remedies For Late Delivery.

There are many reasons why a Supplier could be late in delivering you a product or service.  Sometimes the delay in delivery could be caused by the fact that one of their Suppliers was late in delivering. It could be caused by a production problem. They could have an emergency where they need to be working for another customer. The one area that you need to be concerned about is when your delivery is late because of a financial business decision made by the Supplier.  When there is limited supply Suppliers have a choice as to what customers they ship product to. Different customer sales, and sales to distribution may be more profitable than their sales to you. The natural tendency of any company will be to ship available product to customers that provide them with the highest profit and revenue. The less pain they have in doing that, the greater the potential risk. Other times the decision to delivery product late could simply be an investment decision. The supplier could be weighing the additional cost that would be needed to deliver on time (such as paying workers overtime) against the risk and cost if they fail to deliver on time.

Many times standard contracts have language that provides the Buyer with the ability to cancel the order or exercise the right of cover that would allow you to collect from the Supplier any additional cost of re-procurement. If you really need the product, neither of these may be adequate remedies. Ordering from someone else just places makes delivery even later as you have their lead-time to take into account, so that may not be
a good remedy. If the product or service is custom there may be no one else that is able to provide it.

In negotiating on-time delivery the key points negotiated are:
1) What is the delivery point at which you are measuring performance?
2) What (if anything) is acceptable in terms of early or late delivery?
3) What are the remedies the Buyer has in the event the Supplier fails to ship on time?
4) What is the maximum Supplier’s liability in the event of late delivery?

The point at which you measure delivery should be tied to control. If the Supplier manages and controls the shipping,  I would measure it when it is delivered to your receiving location. If the Buyer manages and controls the shipping, it should be tied to delivery at the Supplier’s location.

For early or late delivery parameters you need to consider the impact. I might agree to a small window that they may ship early if that didn’t cause a problem and as long as the payment obligation in that instance runs from when it was scheduled to be delivered. What you want to avoid is having the Supplier ship a high quantity well before they are needed simply because the Supplier has them so they transfer the cost of inventory from them to you. I’ve always been of the position that there be no tolerance for late delivery as part of the standard of measurement.

In negotiating the remedies the Buyer has you may need to consider whether alternative remedies will provide the Supplier with greater incentive to ship on time. In some situations having liquidated damages for late delivery may be appropriate. In other situations, you might include requirements that if they are late, they pull product out of any distribution channels they may have and ship it to you at no cost. You always would want the right to require the Supplier to ship late deliveries by premium freight at their cost so it isn’t delayed further.  You could also consider including different remedies based upon how late the delivery is as incentive for the Supplier to pull in your delivery. For example if the delivery is only a day or two late you could require payment for premium freight, if its longer then liquidated damages apply.

Suppliers frequently want to cap their liability for late delivery to some small amount such as the value of the purchase. The thing to consider is what your direct damages would be if they were late. For example if the same product could be purchased through distribution what would the cost be? It could be a multiple of what you had contracted to pay and that would be the minimum I would want.

The last thing to remember when negotiating delivery remedies is there are costs to you from a total cost perspective in both situations.  In situations where you have early delivery you may be accruing an inventory carrying cost. If a supplier is frequently late in delivering you probably are carrying a higher safety stock inventory as a result.

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