Purchasing & Supply Chain Management PDF

Purchasing & Supply Chain Management...

Purchasing & Supply Chain Management 7th edition LO4 LEGAL CONTRACTUAL MANAGEMENT ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Why Legal Contract Management ?  It is impossible to predict every single possibility at the beginning of a contractual relationship  Once the contract has been signed, any process begins  Contract management is necessary for adhering to legal, governmental, and industry regulations  Essential for completing contracts quickly  Mitigating legal and compliance risks  Meeting all agreed-upon deliverable dates. ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Legal Contract Management Cycle ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Basic Parts of a Contract Introduction − Identifies parties Clauses − Describe different sets of conditions that parties agree to follow Schedules and appendices − Provides specific details behind clauses ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Preventive Contracting Spending more time in initial stages to more fully understand stakeholder requirements and expectations of contractual elements Flexibility in contract terms and clauses Usually costs less to avoid getting into trouble than to pay for getting out of trouble ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Key Elements of a Purchase Contract  Introduction  Definitions (Key words)  Scope of Agreement / Scope of Work  Purchase Orders (How orders placed, processed, and confirmed)  Supply and Delivery (delivery schedules, lead times)  Specifications (Quality, HSE - Health, Safety, Environment)  Payment Terms (invoicing and payment)  Liability (In case of breaches, damages, or failures)  Force Majeure (Out of control factors & relief provision) ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Effective Date and Termination  Intellectual Property (Use of IP rights & Creation)  Assignment and contracting (Third party involvement)  Technology Improvements (Rights and share of improvements)  Most favored customer (Best terms or at par with others)  Confidentiality (Information protection)  Statistics (Reports & MIS sharing)  Key performance indicators and Compensation (Metrics)  Notices (Delivering official notices) ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Severability (Any part invalid, other clauses still valid)  Third-party rights (If any 3rd company involved)  Free trade areas  Minority- or women-owned business enterprises  General (Miscellaneous)  Governing law (legal jurisdiction)  Signatures  Schedules  Appendices ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  How to Negotiate and Write a Contract  Often modified from earlier agreements without material changes  Minimizes administrative effort  Assumes that previous contracts are appropriate for current agreement  Start with general form and/or sample contracts  Get advice from corporate counsel ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Key Information in Purchase Contracts  What is being bought and the cost  How the purchased item is to be shipped and delivered  How items are to be installed (if appropriate)  How and when buyer will accept products  Acceptance clause  How and when  Appropriate warranties ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Remedies − Including settled damages − Clauses specifying consequences for late performance  Boilerplate Clauses − Standard terms and conditions (Governing Law, Entire agreement, Indemnification, Force Majeure, Survival, Assignment, Waiver, Liability, Counterparts..etc)  Dispute resolution mechanisms ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Boilerplat e Clauses & Condition s ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 12  Key Details in International Contracts Forum selection in the event of a dispute Choice of law (Common jurisdiction for both parties) Payment − Currency used Language Force majeure to be used − Excuses contract performance under non-controllable circumstances − War, natural disasters, or political upheaval ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Types of Contracts FIXED-PRICE CONTRACTS COST-BASED CONTRACTS  Firm Fixed-Price  Cost plus incentive fee  Fixed-price with escalation  Cost-sharing  Fixed-price with redetermination  Time and materials  Fixed-price with incentives  Cost plus fixed-fee ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Fixed Price Contract A Fixed-Price Contract (also known as a “lump sum” or “fixed fee” contract) is an agreement between two parties in which the buyer agrees to purchase goods or services for a set price, regardless of the actual cost to produce them.  The vendor assumes all risks associated with the completion of the project according to the agreed specifications and timeline.  This type of contract provides both parties with a clear understanding of the financial obligations involved, without room for any negotiation on the agreed price ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Firm Fixed-Price (FFP)  Most basic contractual mechanism  Price stated does not change  Regardless of environmental changes  Can be obtained using  Price quotation  Supplier response to RFP  Negotiations  Simplest and easiest contract ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Supplier bears financial risk in rising market, Buyer assumes financial risk in declining market  Supplier may add contingency fee / clause if uncertainty is high  Important for buyer to understand underlying market conditions Example: A company hires a contractor to build a bridge for a set price of $2 million. Regardless of any cost overruns, the contractor must complete the project for that price. ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Fixed-Price with Escalation  Used for longer-term contracts − Where costs are likely to increase over time  Escalation clauses allow either price increase or decrease in base price  Should be tied to an independent, well-established published third- party index Example: A construction company signs a contract to build a facility for a fixed price of $5 million, but the contract allows for price adjustments based on changes in material costs, such as steel or concrete prices in the market. ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Fixed-Price with Redetermination  Used when parties cannot accurately predict labor or material costs and quantities required upfront  Target price is determined using “best guess” estimates  At a predetermined time, buyer and supplier review actual experience and redetermine the fixed price Example Project: Commercial building, Terms: Initial Fixed Price: $10 M, Duration: 12 months, Redetermination Period: Every 6 months. The contract price can be adjusted based on predefined criteria (e.g. bank rates, material costs, labor rates) ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Cost-Based Contracts A cost-based contract is an agreement where the supplier is reimbursed for actual costs incurred, along with additional fees or rewards  Also known as a cost-plus contract, the final price depends on estimated quantities of items needed for the project  Used when there is a high risk of large supplier contingency fee that would be included in fixed-price contract  Lower risk of economic loss for supplier − Economic risk is transferred from supplier to buyer  But can result in much lower cost to buyer ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Need to include terms and conditions that require supplier to carefully monitor and control costs  Parties must agree on allowable costs from all variable costs  Generally applicable when goods and/or services are expensive, complex, or important to buyer and there is high degree of uncertainty ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Cost-Sharing Allowable costs are shared between parties on predetermined percentage basis Key is identification of a firm set of operating guidelines, goals, and objectives, Need to spell out expectations clearly Important during periods of rising prices Example: A technology firm and a client collaborate on developing new software. Allowable Costs: $400,000 (for development, testing, and project management), Cost Sharing Agreement: The client covers 70% of costs above $300,000 ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Time and Materials  Generally used in plant and equipment maintenance agreements − Costs cannot be determined prior to actual repair − Based on agreed upon hourly labor rate plus overhead and profit percentage  Requires “not to exceed” amount  Low buyer control over estimated maximum price Example: A graphic design agency hired to create marketing materials. Labor Rate: $100 per hour, Estimated Hours: 20 hours, Material Costs: $2,000 (for printing and supplies). ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Summary: Types of Contracts ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Desirability of Contract Types ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Length of Contract Term Spot contracts − Purchases that are made on nonrecurring or limited basis Short-term contracts − Contract purchases that are routinely made over relatively limited time horizon Long-term contracts − Made on continuing basis for specified or indefinite period (often >1 year) ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Potential Benefits of Long-Term Contracts Assurance of supply Access to supplier technology Access to cost/price information Volume leveraging Supplier receives better information for planning ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Risks of Long-Term Contracts Supplier opportunism Selecting the wrong supplier Supplier volume uncertainty/capacity constraints Supplier foregoes/ignores other business Buyer is irrational ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Critical Elements of Long-Term Contracts  Initial price − Too high  inflated future profits − Too low  reduced supplier motivation  Price-adjustment mechanisms − Choice of appropriate index or related product  Supplier performance measurement and improvements  Evergreen, penalty, and escape clauses ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Other Types of Contracts Purchasing agreements Online catalogs and e-commerce contracts ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Types of Purchasing Agreements Annual contracts National contracts Corporate agreements National buying agreements Blanket orders Pricing agreements Open-ended orders ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Online Catalogs, Software and E-Commerce Contracts Parity between electronic and paper records Enforceability of shrinkwrap (terms inside the package), clickwrap (by clicking), and boxtop (opening box) agreements, licenses Attribution procedures (electronic communication tracking, IP address) Digital signatures = Normal signature ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Settling Contractual Disputes ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Settling Contractual Disputes All contracts are subject to dispute and interpretation The more complex and larger the dollar volume, the more likely dispute will arise Build in dispute resolution terms and mechanisms Judiciary / Law is the option of last resort ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Legal Action Traditional dispute resolution mechanism − Grounded in commercial law Case heard before impartial judge Issues − Uncertainty − Cost − Length of time ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Face-to-Face Negotiation Simplest method Factors − Give-and-take on a variety of issues − Interpretation of terms and conditions May require additional outside assistance ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Alternative Means of Settling Disputes Action Description Legal action File a lawsuit in federal/state/local court Non-legal actions Arbitration Use of impartial third party to resolve contractual dispute Intervention by third party to promote settlement, reconciliation, or Mediation compromise between parties Exchange of information between managers in each organization, Minitrial followed by negotiation Neutral party conducts “trial” between parties and is responsible for Rent-a-Judge final judgment Dispute Progressive schedule of negotiation, mediation, arbitration, and legal Prevention proceedings agreed to in contract ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Arbitration Fastest growing alternative to legal action Helps deal with negative emotions Arbitration clause is often built into contract’s boilerplate language Source of trained and qualified arbitrators − American Arbitration Association ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  Contractual Terms for Arbitration Spell out location and method of conducting arbitration Review state rulings to ensure presence of appropriate legal provisions Word arbitration clauses carefully using applicable laws and American Arbitration Association guidelines ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  Dispute Resolution Influencing Factors Status of the relationship Choice of mechanism mostly depends on type of outcome desired by buyer Setting preference for future disputes Need for direct involvement by parties Level of emotion involved in finding resolution or take legal action Cost to resolve dispute ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40  Time pressures Information required to reach settlement Strict rules of evidence Likelihood of publicity Credibility of available experts and other witnesses ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 End of LO4 Questions & Answers… ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42