Managing the contract &

supplier relationship
 What is contract?

• A contract is a legal agreement between two or more parties

with the intention of creating a legal relationship enforceable
by law.
• Requirements:
1. An offer.
2. An acceptance.
3. The contractual capacity of the parties.
4. A consideration on something of value.
5. A legally binding relationship.
It’s a written agreement that allocates the risk and rewards of a
transaction between the parties involved.
 Seller’s obligations

• Deliver the goods or service in the way, at the time, and in the
location that has been specified by the parties.
• Deliver the documents that are related to the goods or
services.
• Transfer of title of ownership for a product.
• Assure the conformity of goods.
• Act in good faith and deal fairly.
• Civil liability of manufacturer of the goods in the case of injury
to persons or services.
 Buyer’s obligations

• Accept the goods or services.

• Pay the agreed price.
• Act in good faith and deal fairly.
• Accept civil liability in the case of injury to persons or
objects.
Major issues related to preparing the contract

• What your company wants to obtain.

• What your company wants to avoid.
• What are options available, if all goes wrong.
• What should be included or excluded.
• Which are the actual clauses of the contract to
be used.
 Problems in international P & S contract
• Applicable law.
• Bidding strategy
• Change of ownership/management.
• Changed circumstances.
• Currency fluctuations and foreign exchange controls.
• Delays.
• Delivery.
• Different business culture.
• Dominance.
• Lack of specificity
• Language(s)
 What makes a good contract?
• Know what you want to obtain, what you want to avoid
and what your options are if things go wrong.
• Know your supplier.
• a good contract is one in which all parties win.(“win-win”).
• Never allow someone to make promises that you suspect
can not be accomplished.
• Avoid ambiguous drafting and use terms consistently
• Keep technology in mind.
• Keep intellectual and industrial property in mind.
• Have a clear dispute resolution clause.
• Have a clear termination clause.
• Keep culture in mind.
 Supply strategy and the contract

• The type is relationship that you are trying to

establish with a supplier with have a direct bearing
on the contract.
• The supply strategy will also determine the kind of
relationship have with supplier.
 List of clauses

• Identify the parties.

• Description of goods.
• Duration.
• Volume.
• Contract price.
• Contract price adjustment.
• Delivery.
• Inspection by the buyer.
• Retention of title.
• Payment conditions.
• Documents.
• Liability for late delivery, non delivery, and remedies.
• Limitation of liability for non conforming goods.
• Claims in product liability or otherwise.
• Force majeure.
• Applicable law.
• Resolution of disputes.
• Language of contract.
• Conditions to the entering into force of the contract
• Intellectual or industrial property.
• Definitions.
• Notice and communications.
• Exclusion of headings.
• Merger.
• Modification of contract.
• Change in the parties.
• Assignment.
• Termination for cause.
• Insurance.
• Warranty claims.
• Taxes.
• Performance bonds, advance payment,
 Transfer of risk and incoterms

• Transfer of risk is when the risk of loss or damage

passes from the supplier to the buyer.
• Incoterms are the official international chamber of
commerce(ICC) rules for interpretation of trade
terms. It is most commonly used trade terms in
foreign trade.
• Incoterms provide a standard.
 incoterms
• The thirteen incoterms are divided into four groups.
1. “E” term is the terms for departure in which the seller’s
obligation is the minimum. The carriage is arranged by the
buyer. Risk transfer when goods is ready.
2. “F” terms are used when the main carriage is not paid by the
seller. Risk transfer just after export clearance.
3. “C” terms are used when the main carriage is paid by the
seller. Risk transfer just after export clearance.
4. “D” terms are arrival and are used when seller has the
greatest obligations.
 Applicable incoterms
Air freight Road Rail Maritime &
freight freight inland
waterway.

EXW- EX WORKS X X X X

FCA-FREE CARRIER X X X X

FAS-FREE ALONGSIDE SHIP X

FOB-FREE ON BOARD X

CFR-COST & FREIGHT X

CIF-COST INSURANCE & FREIGHT X

CPT- CARRIAGE PAID TO X X X X

CIP- CARRIAGE & INSURANCE PAID TO X X X X

DAT- DELIVERED AT TERMINAL X X X X

DAP- DELIVERED AT PLACE X X X X

 Managing the contract

• Good contract management helps to save money.

• Contract management is a key contribution to overall
supply chain management performance.
• Project versus operational contract.
• The contract management team
• The contract manager.
• Separation of duties.
 Contract management plan

• Definitions.
• Background information and supply strategy.
• The contract management team.
• Supplier details.
• Partnering information.
• Contract management scope.
• Key provision of the contract.
• Policy & procedure.
 Contract schedule

• CPM

start finish

• Gant chart
 How to manage time of schedule

• Tasked currently planned sequentially can be

undertake parallel.
• Bring additional resources.
• Increasing the number of hours worked per
day.
• Sub contract elements of the work to a third
party.
• Reduce the scope of the contract.
 Managing risk/Risk register

• Risk associated with particular supply market.

• Risk related to the supplier itself.
• Risk register should include followings:-
1. a description of the risk.
2. The factors that could cause the risk to occur.
3. the stage(s) in the contract when it could occur.
4. A classification of the likelihood that the risk will occur.
5. An estimate of the impact of the risk on the contract.
6. the risk management strategy.
 Risk management strategy
Strategy/ response

Develop contingency Modify approach Killer risk, do not

plan to mitigate proceed. Too risky
high impact

Develop contingency Develop contingency Modify approach

plan to mitigate impact plan to mitigate impact
medium

No problem Develop contingency Develop contingency

plan to mitigate impact plan to mitigate
low impact

low medium high

Impact if risk event occurs
 Schedule risk
• Time is more important than cost and quality.
• Causes of delay:
• Incomplete or incorrect specifications.
• Required inputs on either side are late.
• Official bureaucracy.
• Poor communications.
• The supplier does not have sufficient resources.
• Production problem.
• Mistakes.
• Quality problems.
• Shipment problems.
 Cost risk

• When cost is more important than quality and time.

• The contract has been placed on a cost-plus basis.
• Cost risk are:
• Incomplete or incorrect specifications.
• The supplier’s costs increase.
• Adverse movement in exchange rates.
• Inflation
• Increase in customs duty, taxes, fees, etc.
 Managing cost risk

• Incomplete/ incorrect specifications

• Supplier’s cost increase.
• The cost of “add-ons”.
• Cost plus contract.
• Work/hour cost within the buying company.
 Quality risk

• Common quality risk are-

• Incorrect or incomplete specifications.
• Inadequate or incorrect testing and inspection.
• Damage in transit.
 Managing quality
• is all the submitted quality documents satisfactory?
• Are the results of ant inspection and testing unsatisfactory?
• Have any quality concerns been raised?.
• What are the implications of any concession requests that
have been received?
• The issue is given sufficient attention.
• Appropriate resources are allocated to resolving the problem.
• The solution is implemented with tight quality control.
 Commercial and other risk

• Those are general risk, such as-

• Lack of commercial awareness.
• The supplier suffers financial problems.
• The buyer suffers financial problems.
• Change of supplier ownership or key supplier
personnel.
• Lack of responsiveness.
• Force majeure.
 Contract review meetings

• Review of contract implementation.

• Review of actions undertaken since the
previous contract review meetings.
• Any new corrective actions required.
• Review of the contract risk register and
amendment as appropriate.
 Contract administration

• Post contract administration:

1. setting up systems for managing the contract.
2. providing information to the contract management team.
3. Getting all key documents in place.

Ongoing contract administration:

1. document management.
2. monitoring resource levels and costs.
3. expediting.
 Variations and change control

• Two aspects:
1.An internal procedure for approving or
rejecting requests for change.
2.A mechanism for amending the contract to
incorporate approved changes.
Make sure that the value of any change is higher
than the cost of making it!
 Problem solving techniques

• Value analysis/value engineering.

• Cause and effect diagrams.
• Force-field analysis.
• Flow charting.
• SWOT analysis.
• Brainstorming.