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.
Thursday, October 27, 2011
Purchase orders under agreements
Should the Purchase Order become part the Agreement or should the Agreement become part of the Purchase Order? What happens when a supplier wants to exclude purchase order terms.
When you write an agreement that contemplates the use of purchase orders such as a blanket or master agreement would do,that raises a number of issues within the negotiation. Suppliers will always be concerned with the fact that there could be additional or different terms included in the purchase order that could slip through. Most purchase orders seldom require the supplier’s written acceptance. Many get sent and acknowledged electronically. If the purchase order is made part of the agreement, it functions as a later agreement between the parties on the subject matter and could wind up amending the agreement unless you required that al amendments be signed in writing.When you write an agreement that is silent with respect to purchase orders, you would need to incorporate the agreement by reference into the purchase order each time you issue a purchase order. If you failed to do that, only the terms contained on the purchase order would apply.
I believe that you can meet both parties concerns if the Purchase Order clause and the Order of Precedence clause are properly constructed. Here’s how:
1) In the definition of Agreement you would include the purchase order as being part of the agreement but limit that to only the purchases covered by that purchase order. This makes it clear that the intent of the parties is not to amend the Agreement. If you agreement already required any amendment to be in writing between the parties that part out not be needed For example:
“Agreement shall mean this Agreement and any other documents referenced in this agreement. Any unique or different terms contained in a Purchase Order shall apply solely to the purchases made under that Purchase Order.”
2) To address the concerns the supplier has about something slipping through as part of the Purchase Order section I would add language that specifically disclaims any additional or different terms in either the buyer’s purchase order or the supplier’s acceptance (as it could go both ways),
From that disclaimer I would carve out two things.
I would carve out any terms that comply with a valid supplier quote. This means that if the supplier offered a better price, lead time or payment terms, etc. in the quote those terms would apply for purchases made using that quotation even though they were different than the terms in the agreement.
I would also carve out any terms in the purchase order that simply don’t need agreement by the supplier in writing. For example, for ex-works delivery terms you shouldn’t need approval on the ship to location specified in the P.O. If you provided forecasts that were already agreed, you shouldn’t need to have mutual agreement as to quantity as long as the order is within the forecasted quantity. An example of that type of clause could be
“Purchase Order means Buyer’s authorization, in either tangible or electronic format, for Supplier to conduct transactions under this Agreement. Except for orders that comply with a valid supplier quotation or terms listed below where agreement of the parties is not required,
any additional or differing terms contained on the Purchase Order or in Supplier’s acceptance shall not apply unless specifically accepted in writing by the parties. The following purchase order terms do not require written agreement: a) Delivery dates with lead-times that are equal to or greater than the agreed lead-time, b) any quantities specified where buyer and supplier have agreed upon forecasted amounts and the order is within the forecasted amount, c) any changes to ship to location if Buyer is purchasing the item ex-works.”
3) In the Order of Precedence section you would have the precedence say something like::
Order of Precedence
In the event of any conflict in these documents, the order of precedence will be:
1. Those P.O. terms that were mutually agreed in writing by the parties and those terms listed on the P.O. do not require mutual agreement in writing by the parties in accordance the definition of Purchase Order, then to
2. the Agreement.
If you had other documents that are part of the agreement such as a statement of work, specifications and drawings, and other documents, those document should also be listed in the order of precedence or their order of precedence. If you fail to do that those documents will have the same precedence as the document it was incorporated into..
When you write an agreement that contemplates the use of purchase orders such as a blanket or master agreement would do,that raises a number of issues within the negotiation. Suppliers will always be concerned with the fact that there could be additional or different terms included in the purchase order that could slip through. Most purchase orders seldom require the supplier’s written acceptance. Many get sent and acknowledged electronically. If the purchase order is made part of the agreement, it functions as a later agreement between the parties on the subject matter and could wind up amending the agreement unless you required that al amendments be signed in writing.When you write an agreement that is silent with respect to purchase orders, you would need to incorporate the agreement by reference into the purchase order each time you issue a purchase order. If you failed to do that, only the terms contained on the purchase order would apply.
I believe that you can meet both parties concerns if the Purchase Order clause and the Order of Precedence clause are properly constructed. Here’s how:
1) In the definition of Agreement you would include the purchase order as being part of the agreement but limit that to only the purchases covered by that purchase order. This makes it clear that the intent of the parties is not to amend the Agreement. If you agreement already required any amendment to be in writing between the parties that part out not be needed For example:
“Agreement shall mean this Agreement and any other documents referenced in this agreement. Any unique or different terms contained in a Purchase Order shall apply solely to the purchases made under that Purchase Order.”
2) To address the concerns the supplier has about something slipping through as part of the Purchase Order section I would add language that specifically disclaims any additional or different terms in either the buyer’s purchase order or the supplier’s acceptance (as it could go both ways),
From that disclaimer I would carve out two things.
I would carve out any terms that comply with a valid supplier quote. This means that if the supplier offered a better price, lead time or payment terms, etc. in the quote those terms would apply for purchases made using that quotation even though they were different than the terms in the agreement.
I would also carve out any terms in the purchase order that simply don’t need agreement by the supplier in writing. For example, for ex-works delivery terms you shouldn’t need approval on the ship to location specified in the P.O. If you provided forecasts that were already agreed, you shouldn’t need to have mutual agreement as to quantity as long as the order is within the forecasted quantity. An example of that type of clause could be
“Purchase Order means Buyer’s authorization, in either tangible or electronic format, for Supplier to conduct transactions under this Agreement. Except for orders that comply with a valid supplier quotation or terms listed below where agreement of the parties is not required,
any additional or differing terms contained on the Purchase Order or in Supplier’s acceptance shall not apply unless specifically accepted in writing by the parties. The following purchase order terms do not require written agreement: a) Delivery dates with lead-times that are equal to or greater than the agreed lead-time, b) any quantities specified where buyer and supplier have agreed upon forecasted amounts and the order is within the forecasted amount, c) any changes to ship to location if Buyer is purchasing the item ex-works.”
3) In the Order of Precedence section you would have the precedence say something like::
Order of Precedence
In the event of any conflict in these documents, the order of precedence will be:
1. Those P.O. terms that were mutually agreed in writing by the parties and those terms listed on the P.O. do not require mutual agreement in writing by the parties in accordance the definition of Purchase Order, then to
2. the Agreement.
If you had other documents that are part of the agreement such as a statement of work, specifications and drawings, and other documents, those document should also be listed in the order of precedence or their order of precedence. If you fail to do that those documents will have the same precedence as the document it was incorporated into..
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