Monday, August 15, 2011

Most Favored Customer Clauses.

In a separate post I discussed best pricing clauses and many times people view most favored customer clauses the same as best pricing clauses and focus only on price. If all you want to focus on is price you should read that April 11, 2011 post where you will see some of the problems with focusing it strictly on pricing.

Most favored customer clauses don’t have to be limited to just pricing in fact they may be more successful if you focus on the total cost of the relationship rather than price.

If you are a student of total cost you will know that there are a large number of factors that can affect the cost of the relationship other than just the price. In my book I focus a chapter on understanding costs in a supplier relationship. Sure there is price, but there is also the issue of what’s included in the price; There are also a large number of things that will drive costs in the relationship, such as: administrative costs; cost of money, time value of money, cost of inventory, obsolescence costs; costs associated with changes;qualification or re-qualification cost; field costs; hidden costs created by third parties; one-time charges; all the factors that make up landed costs; costs driven by lead-time, flexibility and cancellation; packing or packaging cost if billed separately; costs driven by performance; supplier relationship costs; supply chain costs; costs driven by the supplier’s sales model; the costs associated with the terms, risks and costs you assume; even the selling location and the impact of taxes can impact your cost.

If I felt that I was one of the Supplier’s most favored customers I would want to be given the best of all of those things that they commit to their other customers. If they make commitments to improve another most favored customers supplier chain, I want them to offer those same commitments to me. I would want anything that they offer to another customer that reduces their risk or all the life cycle costs of the relationship to be also offered to me. I want the shortest lead time, the best cancellation or reschedule terms, the most flexibility, the best of all the most favored customers. I may not elect to use all that they offer to others, I may want to only use the savings that that customer will get as leverage to have them provide me something better with equal savings.

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