Monday, August 29, 2011


To manage the life cycle cost of equipment or a repairable /serviceable product, the best time to address the unique issues associated with that is at the time of the initial purchase.If you were buying a product for resale to your customers and need to support that product in the future its critical that you address a number of service related issues whether you will be purchasing maintenance services from them or will be performing maintenance and repair for the customers. Here are a few key points you would address

The term of availability can be how long the supplier is committed to selling maintenances services to you or it may be how long the supplier will agree to make the spare parts or repairs available for purchase. If you purchase the suppliers product for use in your product you normally would want the term of availability to be either the useful life of the product or as long as you have committed to your customers that you will support and maintain the product.

If a supplier is unwilling to provide a guaranteed time period for availability and you still need them, one way to deal with the issue if you are buying standard product is to require them to commit to providing them to you as long as they provide them to their other customers. Many times a Supplier may want to discontinue providing it because the volumes are low. If you need to be able to support the equipment you purchased or need to be able to support your customer you may need to do self repair, self maintenance of need to have that performed by a third party. If you allow the supplier to discontinue the activity there are several things that you need that should be included in your agreement. First you need a requirement of advance notice of the discontinuance so that you can adequately plan for the transition. Second you should have the right to make a last time buy for everything that will be necessary to do the work. Third, you want that right conditioned upon the supplier granting you a royalty-free, non-exclusive, worldwide license to make, have made, use, repair, have repaired, sell or otherwise dispose of the spares or repairs and furnish you with all necessary documentation, specifications, drawings and other data, including its sources for such all repairs, spares and spares components. If the items are proprietary to the supplier you also need to have the supplier authorize the purchase of those items from their suppliers.

Having all the commitments listed in the above section won’t do you any good if you also don’t have a method in your agreement where you are able to control the price.Without that control, the supplier could price the items so that it would be price prohibitive for you to purchase them and effectively avoid the commitment. Suppliers aren’t going to be willing to fix a price over a long term and it they will you probably are paying too much. There are a number of ways that you can build price protection into the agreement. One way is to link it to what other customer pay so you get the best price for those purchase as between all their customers. A second way is to have a price that is based on a percentage off their list price. One of the best ways is to negotiate the prices against the current costs, and then agree to adjust the prices based upon changes in a standard index based upon where the work will be performed. For example for the United States you could limit the amount of any changes to changes in
the Producer Price Index (PPI) for Industrial Commodities (Table 3), for the previous twelve months.

When you return buyer owned material to a supplier for repair, what you are technically doing is bailing the goods to them. As such you need to include the typical protections that you would include in a bailment.You identify them as owned by you in the accompanying Shipping and Billing Authorization Form.You state that you will retain title to all such items, unless the Supplier provides a replacement. In a replacement situation title to the replacement and title to the original should transfer simultaneously. You would own the replacement and the supplier would the own the original.You require that while the buyer-owned material is in their custody and under their control the Supplier must insure them at their expense in the amount of their full replacement value against all risks of physical loss. You require that the Seller shall keep your items separate and identified as Buyer-owned and require that use such items be solely per the terms. This is to prevent their re-selling them and to allow you to recover them if the Supplier ever went bankrupt.Lastly you want the right to demand return of the items if necessary.

An advance swap program is when the Buyer identifies an item is defective and there is agreement that the Supplier will immediately send a replacement out of their inventory so the buyer has a working item usually the next day rather than have to wait for the normal repair process to take place. You would consider an advance swap program when the length of any down time is critical and it may not be economically feasible to inventory items at all locations where it is used. In an advance swap situation the supplier would establish an inventory of known good products that could be shipped immediately and they place the item that is returned back into that inventory once it has been repaired. An advance swap program could be at a product level for items that are small and light enough to be shipped overnight or it could be at a sub-level referred to as a field replaceable unit (FRU) where the defective item could be swapped out at the site. In a advance swap situation, the supplier will own the material that was advance swapped until buyer either meets the conditions of the advance swap or makes payment for the item. The risk of loss for any advance swap would be determine by the delivery terms agreed. Advance swap programs could be done for either in warranty or out of warranty programs. In an advance swap for a product under warranty, as long as the warranty wasn’t voided, the ownership to the returned item would belong to the supplier upon receipt. If the warranty was voided, the Buyer would still own the item and would also owe the supplier for the cost of the replacement. In an out of warranty situation, since there was no warranty in effect, the Supplier would own the material subject to two conditions being met. The item would need to be repairable and the buyer would need to pay the agreed out of warranty repair cost. If the item wasn’t repairable the buyer would still own the material and would also be obligated to pay the supplier for the full value of the repaired item.

In negotiating spare parts and repairs you may need to negotiate two different lead-times. One lead-time would be for standard orders that require standard replacement times. The other for emergency orders from supplier stocking hubs. The contract may identify a specific quantity that the supplier agrees to hold for emergencies and the buyer will usually pay a premium for those items to cover the cost of inventory. Once an item items is consumed the supplier will usually have normal lead-time to replenish those back into the inventory. Once the inventory is exhausted the supplier may, but usually is not obligated to provide replacements until the stock is replenished. As needs change and because the buyer normally will have liability to purchase the stock held for them, the buyer may need to frequently adjust the level of any emergency inventory being held. Where that is most important is when the item is custom or unique to the buyer where there is no other potential customers.

When you need spare parts and repairs for the long term you also need to manage any changes the supplier can make to those items. If changes cannot be prevented in the contract then you need additional terms to protect you. One approach is if the supplier makes a change in form, fit, or function to the spare parts or repairs that, in buyer's opinion, adversely affects they buyers ability to maintain, support, and repair the supplier's products, then supplier would be deemed to have discontinued availability of the spares and repairs and you would want the same rights that you would have for an actual discontinuance that are listed above. If the buyer agrees to such changes you will want all documentation needed to install the changes and shall make all necessary parts available to Buyer at reasonable prices that are no more than what they sell those to their other customers..

In purchasing spare parts or repairs in addition to any of your standard requirements for packaging or packing, you may have a number of additional concerns. Instead of an items being provided in bulk packaging like you would use for production shipments you normally want the items packed to the lowest possible level so it can be inventories and stored in spare parts or repaired parts inventories. You also want the outside of the package to identify a number of things like the part number, qualtity, date, etc.. That’s because you want the contents to be easily identified for inventory and stocking and you want the date so that inventory can be managed on a first in first out (FIFO) basis so you take full advantage of the warranties and for items that have a shelf life make sure they are used within their shelf life. For items that could be damaged by handling such as electronic components you also want the item to be protected against that potential damage. An example of that is electro-static discharge (ESD) where an individual that isn’t properly grounded touches the item and sends a static electronic shock to the item and causes damage. For that you would want the item protected by being packed in an ESD protected back and then packed.

If you want or will need to do self- maintenances you will need to get the supplier’s manuals, schematics, course materials, and literature. If you have many locations and many people that will need to perform the maintenance, you want the right to use, make copies of, take extracts from all of those documents to provide training. All those materials will be copyrighted by the supplier so without being granted the rights, every time you needed a copy or want to make a change you would need to get approval from the supplier.

If the plan is to perform self maintenance and the supplier will support that there are a number of things you would need.Copies of the supplier’s current spare parts price list and updates as they are issued to any of its other customers.A price list covering all tools having an industry standard number or manufacturer's number which are used to test or service the Spares.Ability to purchase any tool not having an industry standard number that are required to test or service the spare parts and their lead time for its shipment.A list of electronic and mechanical components of spares with a) industry standard designations; b) sizes where applicable (e.g. nuts, bolts, etc.); c) manufacturer's numbers for all component parts.A list of recommended spares parts. An illustrated parts breakdown Line drawings and/or assembly drawings for any spare parts not shown in the illustrated parts breakdown.An operator's guide with fault correction instructions keyed to fault indicator.A maintenance guide including installation instructions and preventive maintenance instructions.A print Set with drawings, logic diagrams, schematic diagrams, layouts, block diagrams, flow charts and software listings.

If needed the buyer may require the supplier to provide buyer personnel with training. The usual issues for training are:The number of classes for buyer personnel and cost The location(s) for the training. The number of attendees allowed for each class.The requirements for instructors, all course equipment, course modules, course materials, and training manuals.The scope of the training to be performed. The student to equipment ratio allowed for any hands-on training.
Rights to videotape classes for training purposes.

If the buyer, after the term of availability, needs to perform repair the contract would also include: The supplier must grant the buyer the right to repair or have repaired the spare parts, material and equipment.This would not be required for repairs to your own equipment.The supplier needs to provide the buyer with:A list of components and supplier approved suppliers for those components. For parts that are not available to Buyer from sources other than Seller are to be listed and unit prices identified with quantity discounts, if any. Parts having generic industry identification need to be cross-referenced from any supplier part number to generic part numbers. Available test specifications and test procedures and drawings required for testing.Full description, manufacturer's model numbers of the test equipment.

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