Finalizing The Integrated Supply Agreement
A basic integrated supply agreement should have the following components:
- Products
The degree to which products or services being sold are described in the contract depends upon the needs of the customer. This can vary greatly. At a general level, products may not be specified and pricing may be set at an aggregate level (e.g., cost-plus). The purchaser may decide to make the agreement more specific and list every product covered under agreement along with individual pricing and terms and conditions.
- Condition of Sale
The terms and conditions should specify how the supplier is to be paid. Typical payment terms for integrated supply agreements vary from net 15 to net 60. In addition to the payment terms, the method of payment should be specified. For example, is the supplier expected to perform traditional invoice billing or use EDI?
- Term
A typical agreement should be long enough in duration to develop a strategic mentality, but short enough to allow either party to exit the agreement if things do not work out. One of the most common ways to do this is to author an agreement for two or three years and add an evergreen clause. The evergreen clause allows the agreement to continue if neither party objects in writing.
- Consignment Conditions
If consignment or other special inventory vehicles are to be used, specify how and where the activities are to take place. Consider any collateral costs related to the activity and who will pay for them. For example, if storage cabinets are needed for consignment materials, will the buyer or supplier pay for them? “What activities does your firm require to ensure the integrated supply model works best?”
- Duties of Seller
What needs must the supplier meet? Specify any required timing for delivery of products or services needed for your operations. In addition, you may want to impose monetary incentives/penalties depending upon the timeliness of delivery by your supplier. If on-time delivery is important, you will want to specify the delivery performance expected of the supplier. Use a indicator such as percentage of ontime deliveries to monitor the supplier's performance.
- Duties of Buyer
What activities does your firm require to ensure the integrated supply relationship works best? Before committing to anything, check with your organization to ensure it can meet any commitments you make to your supplier.
- Title and Security Interest
Clearly delineate who has responsibility for any material and at what point ownership changes. This not only applies to consignment inventory but to all other relationships as well such as JIT. If the agreement requires delivery of material to the receiving organization, ensure FOB terms are delineated.
- Pricing
Specify the type of pricing methodology your organization requires. In addition, you may want to add clauses that require the supplier to provide cost information or allow you to audit their costs (for example, manufacturer's invoices) on a regular basis.
- Rescheduling
What type of lead time does your organization require? How often do you reschedule deliveries? Dependent on your situation, you can develop terms that provide your organization with favorable rescheduling terms. In addition, you may specify buy-back or return conditions with your supplier.
