Wednesday, February 16, 2011

Negotiation - Thoughts on Negotiating Delivery Terms

In negotiating delivery there are two things you negotiate, the delivery point and the delivery term. For example, Delivery shall be FOB Origin, Suppliers Dock in Matamoros, Mexico.  The delivery point is the place at which delivery will take place. For Buyer’s it’s important to specify the delivery point as the Supplier may be able to deliver from multiple locations and if the Buyer is responsible for things like paying for the freight, duties, or insurance, a change in location could impact the Buyer’s costs.

The Delivery term defines the specific responsibilities between Buyer and Seller for the delivery of goods. Delivery terms range from Ex-works (where it is Buyer’s responsibility to manage everything from the Supplier’s dock or agreed delivery location including having it loaded on the initial carrier) to Delivered Duty Paid (where it is the Supplier’s responsibility to assume all costs to the Buyer specified delivery point). A good listing of the many standard delivery terms is in the International Chamber of Commerce INCOTERMs. 

When negotiating the delivery point and delivery terms most of what you are negotiating is cost and risk based upon the responsibilities of the parties. Who pays the cost and who bears the risk. Delivery terms will also impact other aspects of the negotiation such as payment, time for acceptance, etc. as those are frequently linked to when delivery occurs. If the Buyer purchases under terms such as FOB Origin or Ex-works, delivery occurs at that point even though the item may be in-transit for days or weeks before the Buyer actually receives it at their location.

Delivery is traditionally a trigger that starts many things. It starts the payment clock. It usually starts the period during which you have acceptance rights. It also usually starts when your warranty will commence. This means that any in-transit time will cut into the value of any extended payment term, your period for acceptance, and your warranty. If you agree to origin based terms, you need to understand the full impact of that decision as it’s not just a decision as to who has the least expensive distribution costs. You need to take the deliver term into account when negotiating your payment, acceptance, and warranty terms if those terms are linked to when the product or service is delivered to you.

Another key aspect of delivery terms is the agreed delivery term also establishes the point of sale between the parties and the point of sale impacts the taxes the supplier will pay on the profits they make. So if a Supplier is unwilling to agree to a specific delivery point and term, it may be because they want to manage the taxes they pay and another location may be more advantageous from a tax perspective.

If a Supplier wants to sell on origin based terms, you should add the expected in-transit periods to the time you have to accept the product or the time you have to make payment. The last think you would want is to have your right of acceptance or rejection of defective items lapse while the item is in transit.

In negotiating warranty, you should try to have the Supplier take into account your total supply chain time and provide a warranty based not on when they delivery it to you, but more on when it would be expected to be at your customer by providing a longer period from the actual delivery date. For example, if your average supply chain time is 30 days, and the normal warranty you want from Suppliers is 36 months to match what you give your customers, you might negotiate a 37 month warranty from the date of shipment so that you have 36 months at the customer.  Supplier would prefer something like that rather than having a warranty be 36 months after deliver to the customer.  When its delivered to the customer they probably can’t track but they will always know when they shipped it.   

Negotiation - Thoughts on Negotiating Effective Dates

In negotiating the effective date of the contract, what you are negotiating is when the terms of the contract will apply to the Products or Services purchased.  The effective date of the contract doesn’t need to be the date you sign it, it can be any date the parties agree upon. 

There may be times when you may want the effective date to be retroactive to a date prior to the actual signing of the Contract. This would be to ensure that Product and Services purchased in contemplation of the Contract are covered by the Contract terms, and any prior volumes count toward related commitments in the Contract.

If you enter into a contract in which purchases will not be delivered until some time in the future, setting an effective date in the future would only make sense if something like the term of the contract or some obligation is linked to the effective date.

In negotiating the effective date of a change or amendment you always need to take into account the total life cycle cost impact of the date. A friend of mine managed a procurement group and one of his people had negotiated a price reduction but agreed to have it take effect three months into the future. That made my friend furious and the Buyer didn’t understand the problem.  The amount of the reduction seemed small, only $.50 per unit. The problem was that within those three months about a half a million units would be purchased and by agreeing to have the change be effective three months later they effectively gave away a quarter of a million dollars.