Monday, May 14, 2012

Differences between production procurement and retail procurement

To explain the differences between procurement for production versus procurement for retail/resale
I generated a list of contract terms and explained how each are different as the impacts to the two by a supplier, and supplier’s performance are different and the relationship with the end customer is also different.

Acceptance acceptance criteria:
Production view: Based upon complying with the product specification.
Retail view: Based upon complying with the supplier’s current specification

Acceptance or rejection of non-conforming work
Production view: Requires return to the supplier.
Retail view: Requires return by customer to supplier. (Reseller may never open package)

Accept Conforming Purchase Orders
Production view: May be important term for continuity of supply.
Retail view: Less of an issue as fewer potential changes will occur.

Access To future Products
Production View: Depends on need, May be important.
Retail view: Desirable to continue resales

Allocation Of Supply
Production view: Important activity to address especially if single sourced.
Retail View: Depends upon relationship. The more dedicated to the supplier you are the more protection you would want.

Assignment rights
Production view: Usually prohibits assignment to manage quality and performance.
Retail view: Less of a concern as no production is involved that a change would impact.

Availability of Spare Parts, Repairs, Support
Production view: Important to protect the life cycle cost of the purchase or to provide customer warranty and service support.
Retail view: More of the customer’s problem.

Buyer’s right to make changes To Specifications
Production view: Requires mutual agreement
Retail view: Usually not included. Reseller sells what supplier makes.

Carrier selection
Production view: Important for any non DDP delivery terms.
Retail view: Same

Production view:All changes require mutual agreement to ensure changes work in buyer’s application.
Retail view: Supplier free to make changes as buying saleable product

Compliance with laws, regulations or ordinances
Production view: Important as can impact the ability to sell or use the product.
Retail view: Important, as you don’t want to buy products you can’t import or resell

Contract Term
Production view: A defined period of time. Usually long enough to recover all investments made to qualify and use product.
Retail view: May be short if reseller’s investment is minimal.

Cost reductions
Production view: Frequently needed for long term relationships.
Retail view: Focus is on market competitiveness and maintaining margin versus cost

no difference

Delivery terms
Production view: Agreed by the parties, normally ex-works supplier.
Retail view: Same, but may require delivered terms with location stocking.

Delivery Flexibility
No difference

Delivery performance
No difference

Early Shipments
No difference, neither want things early.

Epidemic Defects
Production view: Major concern to deal with cost that occur in the field and rework to correct problem.
Retail view: Not an issue as all supplier returns managed by supplier.

Entire Agreement or Merger provisions
Production view: Included as there may have been discussions prior to agreement about the supplier’s product.
Retail view: May be heavily influenced by common standards of trade within the industry.

Force Majeure
Production view: Important for both buyer and supplier
Retail view: Usually less important. May not be making firm commitments to reseller and reseller may not be making firm commitments to customers

Governing law
No difference Buyers may want it to be location of sale.

Guaranteed period of availability of product
Production view: Very important, especially if you are single sourced.
Retail view: More of a customer impact. Would want commitment if you are prevented from selling competing products.

Intellectual Property Indemnifications
Production view: Important because of the potential magnitude (could affect huge number of products).
Retail view: Less important because reseller would traditionally only pass through supplier commitments.

Production view: Key issue in managing inventory.
Retail view: Less of an issue as not linked to production, production down-time. Would be more of a concen for seasonal sales

Limitations on liability
Production view: Important, usually concerned with the overall value of the purchases over time.
Retail view: Less important as reseller isn’t changing anything and only passing through supplier commitments.

Long Term Support
Production view: May be required as long as the Buyer has support obligations to their customers.
Retail view: Not required

On-time delivery
Production view: Important to manage to the production schedule.
Retail view: Less of an issue because impact is less.

Packing And Packaging
Production view: Important to manage against potential damage if delivery term has you assume risk of loss. Also important from inventory perspective.
Retail view: Important to manage against risk of loss.

Payment terms
Production View: Traditionally net terms X days after delivery.
Retail view: Same, but may also be based upon sale.

Performance improvement requirements
Production view: Important for longer term relationships.
Retail view: Not as important as don't have the same quality cost impact.
Personal Injury.
Production view: Concern applies only to product liability or automobile caused injuries and property damage.
Retail view: Concern applies primarily to product liability which cannot be disclaimed.

Production view: Unit based, more focused on cost.
Retail view: Unit based, more focused on margin.

Price Changes
Production view: May occur at the end of the term before any new term or must be agreed by the parties
Retail view: May occur more frequently but more tied to margin (suggested selling price with discount).

Property Damage
Production view: Concern only with product liability and automobile liability
Retail view: Concern with product liability.

Product Withdrawal - End-of-life
Production view: Can be a major issue if no replacement product or replacement does not work in your application
Retail view: Less of a concern if supplier has a replacement you can sell

Production view: Usually requires restocking fee and may be limited to new.
Retail view: May provide for customer remorse returns.

Total life cycle cost
Production view: Significant concerns about life cycle cost as warranty term, cost of maintenance, spare parts or repairs affect profitability. Retail view: Total life cycle cost is a supplier / customer issue.

Quality Levels & requirements
Production view: Important to manage on-going quality cost of production.
Retal view: Seldom a concern as cost of quality issues such as returns are borne by supplier.

Remedies for late delivery
Production view: May include things like right to cancel order, require premium shipment etc.
Retail view: Less of a concern because impact of late delivery is less.

Reschedule Orders
Important tool for both to manage supply versus demand.

Survival provision
Production view: Key to identify terms that will survive termination or expiration of the contract because of commitments to customers
Retail view: Key is to identify the terms that survive the delivery of the product (limited only to issues between supplier and reseller)

Taxes and Duties
No difference

Technical Support needs.
Production view: May be required for determining root cause of problems experienced by customers under warranty.
Retail view: Usually none, as supplier provides customer support.

Warranties and Representations
Production view: Will contain many warranties about the product.
Retail view: Will include pass-through warranties supplier provides to end customer. Reseller seldom provides to customer.

Warranty Redemption, RMA processes
Production view: Important process to ensure you get committed warranties.
Retail view: Customer issue. Reseller usually avoids being involved or gets paid to provide warranty support.

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