Friday, October 28, 2011


There are many ways you may be locked into using a supplier. Tooling is a good example. When it comes to making a tooled part there are two issues. Who owns the design of the tool and who owns the tool itself.

When you are having a supplier make a tooled part and you want the flexibility to be able to change suppliers, you should own the design and the tool so you can move the tool to another supplier. With the supplier you would enter into what’s called a tooling agreement.A tooling agreement is very similar to a bailment or loan situation. Similar to a bailment you want:
> You want the tool to be identified as your property.This is done to protect it in the event the supplier went bankrupt. In a bankruptcy situation if you can prove that property held at the bankrupt supplier's site is yours you can recover it. If you can't prove that, your rights in that property are no different than any other creditor.
> You want to require that the supplier not encumber the title to the tool.
> You want the supplier to insure the tool and have you named as the loss payee.
> You want the tool to not to be moved without your agreement.
> You want the supplier to not alter or modify the tool.
> You want the right to inspect the tool.
> You want the right to remove the tool at any time.

The unique requirements that make it a tooling agreement would include:
> Limitations on use, so the tool is only used in making products for you unless you agree otherwise.
> Requirements that the supplier service and maintain the tool and keep it in good working order.
> Responsibility defined for replacement of the tool when the tool is no longer useful. Normally the supplier would be responsible to replace the tool if they were negligent and damaged the tool. It is also normal that the buyer would have responsibility for the cost of replacement if replacement was required as a result of normal ear and tear. If you allowed your tool to be used
by the supplier in production for their other customers, you would want the other customer to both pay you for using the tool and share in the cost of the replacement.
> If you were concerned about the supplier using the design or the tool with other customers you would want to restrict them from making copies of the tool.

In most situations the buyer wants to own both the design of the tool and the tool itself. Owning the design of the tool makes it your intellectual property that the Supplier couldn’t use to have tools made for others without infringing your intellectual property rights. If you own the tool,unless you have another commitment with the supplier that locks you into using the supplier (like a firm quantity commitment), you have the flexibility to move the tool at any time to another supplier. That helps keep competition in the equation for future negotiations. If supplier owned the design of the tool, you couldn’t use the tool with another supplier. If the supplier owns the tool you can’t move it. You would need to purchase it, and the supplier has no obligation to sell it to you. That puts you into the position where you have two choices and neither of them are good. You can stay with the supplier and be locked into using them, or you would need to have a new design and buy a new tool to move to another supplier.