Thursday, October 27, 2011

Should your contract require the supplier to accept all purchase orders?

When you write a blanket or master agreement with a supplier the goal is to be able to get products or services from the supplier when you need them. If your agreement doesn’t say anything about accepting all orders each time you issue an order the supplier could refuse to accept that order, negating the value of having the agreement with the supplier in the first place.

There are several reasons why a supplier may not want to be obligated to accept all purchase orders. One is they have a limited capacity and as a result may not be able to meet the demand reflected by your order within the lead-time agreed. A second is the supplier could be in a situation where they have excess demand from all their customers and need to allocate the product among all of its customers. A third is they have excess demand and they simply want to sell their limited capacity through the channels where they make a higher profit margin. For example OEM’s prices are usually lower than the selling price to the supplier’s distributors so they would make more profit selling through that channel.

From a Buyer’s perspective, if you need an order delivered by a specific date the last thing you want to have occur is have the product or service simply never be delivered because the supplier failed to accept the order. At that point, even if you did have an alternative supplier that could deliver, you would either need to wait their lead-time to get delivery or, if it was available through distribution, you would need to pay a much higher price to get them item. If you are single sourced with a supplier or are counting on supply form that supplier and they don’t accept the order, your supply chain is now broken and you won’t be able to do what you intended to do with the purchase. This can potentially stop you from shipping your own product or providing your own services and that will impact your company’s revenue and profits.

Contract terms should be there to protect the continuity of supply that you are dependent upon. Every contract that I’ve ever written where I was dependent upon the supplier’s performance I would always include a requirement that the supplier will accept all purchase orders. If the supplier pushes back on that requirement, I will normally agree to include the following concepts
for that commitment:

The purchase order must comply with the terms and conditions of the agreement and not contain any additional or different terms unless the parties have agreed that they will accept such terms (for example the terms reflect a supplier quote)

I will agree to negotiate, as part of the agreement, limitations on the quantity that they are obligated to provide me without requiring their agreement. That may be done by including a specific quantity limit, or by establishing an agreed forecasting process. This allows you to plan and manage in advance any potential shortages.

Lastly I will agree to negotiate a provision where in the event the supplier needs to put the supply on allocation, I will accept a reduced quantity under that purchase order as a firm commitment and anything over that quantity as something that they will use reasonable commercial efforts to provide. The commitment to accept less than the order amount in the event of allocation would be conditioned upon my getting a pro-rata share of the available quantity based upon the percentage of my prior business with the supplier on those products or services. What this last requirement does is prevent the supplier during periods of allocation from shipping a higher percentage of their products or providing a higher percentage of their services to other customers where they may make a higher profit margin or have a closer relationship.

If I need to count on a supplier to perform and the supplier is unwilling to commit to accept all purchase orders with these three conditions attached, I would simply tell them that since I can’t count on them for delivery they can expect several things. First I will need to establish alternative sources of supplier, they will never be a single source. Second it will also mean that amongst multiple suppliers they will never be consider a primary source of supply. Supply is not a faucet that you can turn off and on. If you can’t rely upon them to deliver, the majority of your business you will need to give to suppliers that you can rely upon.

No comments:

Post a Comment