Assignment 2 : Contacts in Procurement And Supply

Definitions

‘Conditions’ means the terms and conditions that are outlined in this document

‘Contract’ refers to the agreement made between the parties for sale and purchase of goods

‘Goods’ refers to the deliverables as set out in purchase order

‘Order’ means the purchase order presented to the supplier with listing of goods to be supplied

‘Supplier’ refers to the party contracted to deliver goods

1. Prices and payment

1.1. All the prices that have been quoted will remain fixed as agreed on the purchase order and expressed in US dollars ($).

1.2. The prices are exclusive of VAT but includes all other applicable taxes as well as incidental cost likely to be incurred.

1.3. The price is also inclusive of any packaging, insurance, customs and delivery costs to be incurred by the supplier as per the specified descriptions in the agreement

1.4. The invoice shall be presented upon delivery of the goods and payment will be made within a period of 30 days upon inspection of the goods to ensure that they meet the necessary standards.

1.5. Payment shall be made through a cheque addressed to the bank that has been nominated by the supplier in writing

2. Delivery of goods

2.1. The supplier will be responsible for ensuring that the goods are delivered to the agreed premises.

2.2. The goods shall be supplied on the specific date that has been stated on the purchase order. If the date has not be stated, the goods shall be delivered within 5 days

2.3. Any delivery after the agreed time shall be deemed a default by the supplier and he shall be liable to pay for any damages incurred as a result of the delay

2.4. The goods shall be properly package and secured to ensure that they get to the agreed location without any damages

2.5. The supplier will attach a delivery note in the consignment. It will include details such as the date and number of the order as well as the details of the goods being delivered.

2.6. The delivery process shall be deemed complete once all the goods have been unloaded at the stated location

3. Quality of goods

3.1. The supplier shall be responsible for ensuring that all the delivered goods meet the required quality standards

3.2. The goods shall meet the set specifications on the purchase order

3.3. The supplier will ensure that the goods delivered are in the right condition. This will include the right design and materials.

3.4. The goods shall be available to be inspected and tested for quality purposes at any point before they are delivered.

3.5. Any goods that will not meet the required standards of quality shall not be accepted

4. Confidentiality

4.1. The supplier shall ensure that all information provided is kept confidential and not exposed or furnished to any third party.

4.2. There shall be no public announcement or disclosure of the agreed contract

4.3. The supplier shall ensure that the staff understand the need to ensure confidentiality of the contract and its contents

4.4. Any case of disclosure shall be deemed a default by the supplier and he will be required to pay for the damages caused

5. Ethics

5.1. The supplier shall remain ethical in all dealings in the production of goods and not engage in any unethical act that can portray the two parties as being unethical

5.2. The supplier shall disclose all the process of production for inspection and review to ensure that ethics has been upheld

5.3. Any case of unethical conduct reported about the supplier shall result to termination of the contract with no compensation for any work in progress

5.4. If there are cases of supply of goods produced unethically the supplier shall be deemed to have defaulted and will be required to pay for any damages caused

6. Termination

6.1. The contract may be terminated in whole or part any time before the goods ordered are delivered. This will be done by giving the supplier a notice where compensation shall be made for ongoing work.

6.2. The contract shall be terminated with immediate effect if there is prove of breach of the terms in the contract or involvement in unethical practices.

i. Managing risk of poor quality

The set terms and conditions ensures that the suppliers do not compromise on the quality of the products supplied. It has for instance been pointed out that it is the responsibility of the supplier to ensure that the goods supplied are of the required quality and meet the specifications in the purchase order. This is also emphasis on the design and the materials that are used to make the products which have to be of the right standards. In addition, the terms and conditions states clearly that any goods that do not meet the right quality will not be accepted. This ensures that the supplier focuses on quality and ensures that there is no compromise. This will also apply to the process of packaging and delivering the goods where the supplier will ensure that they are handled properly to avoid any damages. It has also been stated that the goods shall be available for inspection and testing before the delivery is made. This means that there is an opportunity to inspect the goods in the production process to ensure that the right materials are being used and that all the production processes are being undertaken in the right manner. In this way there is a greater assurance of delivery of quality goods as opposed to allowing the supplier to work without any specifications or inspecting the goods in the production process to ensure that the right material are being used (Walter, 2001).

ii. Managing risk of time extension

When contracting there is a risk of time extension where the contracted supplier may not be able to deliver the goods ordered at the right time and they will want to seek time extension. This could however mean that the organization will not be able to deliver on its obligations to the customers. It may also mean that there will be stoppages in the production process as a result of lack of materials for production due to the delays by the supplier. This is costly for the organization as it results to loss of trust by the customers and other costs such as idle time by the production employees. For this reason, the terms and conditions states that the goods that have been ordered for shall be delivered on the agreed date with no delay. If there is no such agreed day, the supplier will be required to deliver within 5 days from the time when the order is made. The supplier must confirm that they are able to meet this deadline and will not need any extensions. In addition, it has been stated that the supplier will be required for any damages that will be incurred as a result of the delay. This could include damages as the lost sales as a result of cancelled orders by customers due to delays as well as the idle time by the employees as a result of stoppages in the production process. These terms therefore ensure that the supplier remains committed to ensuring that the deliveries are made at the right time to avoid paying for the damages (Heim, 2008).

iii. Managing risk of increased cost

There is a risk of increased costs in the process of contacting for supplies where the supplier may want to increase the prices in as a result of the changes in the market conditions and market rates. This would be costly as it would mean that the goods have to be sold at a higher cost to cover for the increased input cost. This kind of price increases will however be prevented given the fact that the terms and conditions state clearly that the price quoted will remain fixed. This means that the supplier has to stick to the agreed prices despite the changes in the market trends. In addition, the currency in which the prices are set is also stated clearly which means that the supplier cannot decide to use a different currency which would result to increased prices as a result of the exchange rate costs. In addition, the terms and condition identify the taxes that have been included in the price and the tax that has not been included in the price. The price for instance is exclusive of VAT which means that the supplier cannot decide to include the VAT on the price stated in the invoice presented. The terms and conditions also help to avoid cases of price increase by ensuring that all the additional costs that are incurred in packaging, insurance and delivery which means that the supplier cannot decide to charge these costs separately which would mean an increase in the overall cost per product that is paid to the supplier. The terms and conditions therefore are effective in ensuring that there is no risk of price increase for the goods that have already been ordered (Nagle, 2006).

iv. Managing risk of unethical practice

Another common risk in the procurement and supply contracts is the risk of unethical conduct by the supplier which could have negative impacts to the image of the organization. If the supplier engages in unethical practices such as corruption, forced labor or illegal acts in the production process could result to an organization being viewed as being unethical as well for purchasing products. For this reason it is important to ensure that the supplier does not expose the organization to ethical issues by supplying goods that are produced using unethical practices. For this reason, the terms and conditions states that the supplier will need to ensure that all the goods that are supplied are produced using ethical process. It also states that the supplier will need to disclose all the process of production of the supplied goods where needed. This will offer an opportunity to establish any cases of unethical practices which could pose a threat to the image of the organization. In order to safeguard the interests of the organization, the terms and conditions states that any case of unethical practices that has been reported or established will result to termination of the procurement contract. This will ensure that the supplier does not compromise on ethics when supplying goods and will ensure that all the processes in the production of the goods are ethical. To further cover the risks that the organization is exposed to, the terms and condition also point out the fact that the supplier will pay for any damages incurred as a result of ethical issues arising from supplied goods. Such damages will include lost sales due to the damaged reputation of the organization in the public domain (Oliver, 2008).

Battle of forms can be described as the scenario where a legal dispute arises between two parties that are contracting as a result of each party insisting on its own standard terms. In this case both parties come to an agreement that they are entering a contract that will be binding. They are however not able to settle on the terms and conditions that will apply as each of the parties insists on the terms that are favorable to them. It starts with one of the parties or businesses making an offer which is usually in the form of a pre-printed contract that has his own terms. The party that is being offered the contract also responds with its own contract that also has a set of terms and condition which are favorable to them (Shahar, 2005).

The battle of forms therefore arises when each of the parties fails to agree to the terms provided by the other party given the fact that the terms are only favorable to the respective party that is drafting and in most cases they contradict each other. The battle is eventually won by the party that presents the terms that are not explicitly declined by the other party and as such the contracts becomes valid. A good example of ‘battle of forms’ is in a case where a company purchasing delivers a purchase order to the supplier. The order however has a list of standard terms that are one-sided and only favorable to the company that is making the purchase and not good for the supplier. In response, the supplier sends an acknowledgement form that also has a list of standard terms that are only favorable to the vendor and which in fact are the opposite to the terms that are presented by the purchaser (Steensgaard, 2015).

There are various ways to ensure that the agreement is carried out under own terms and conditions. One of these is ensuring that the terms are reasonable and that they are not one sided hence making it difficult for the other party to cope with. The terms should be reasonable enough where each party feels that they are fair and not biased towards one side. In addition, it should be easy to demonstrate the reasons as to why the terms and conditions have been set and the consequences that may arise as a result of failing to comply with the terms. As such it will be possible to convince the other party that they are good for both of them (Oliver, 2008).

Another way to ensure that the terms are accepted by the other contracting party is to ensure that they are communicated early in advance. This ensures that the party develops an early perception of what to expect which will make it easier for them to accept the terms. This is as opposed to presenting the terms at the point when the contract is being signed when the other party has no considerable time to reflect on the implications of the terms. Presenting the terms and conditions at the last minute could result to the other party suspecting that there are hidden clauses which will not be favorable for them hence failing to agree to the terms (Thorpe, 2009).

An organization can also ensure that own terms are applied in the contract by ensuring that the terms set are in line with the general industry terms and conditions. There are common terms that are applicable in contracts between hotels and suppliers for instance. Setting own terms which are close to the general terms and conditions that are applied in the industry makes it easier for the other party to agree to work with those terms. This is because they are used to them and will find it easy to cope. Where possible, the set terms and conditions should be closely aligned to those that were applied in similar contracts between the two parties before (Lawson, 2011).

The management and monitoring of the key measures under the contract is achieved by ensuring that the supplier gets a good understanding of the terms and conditions. The terms and conditions outlines some of the key performance measures under the contract such as timeliness and quality of the goods that are delivered. Going through the terms and conditions therefore ensures that the supplier has a good understanding of the performance measures and what will be used to judge their performance. The terms and conditions ensure monitoring and management of relevant performance measures by ensuring that the organization has the ability to collect and analyze the necessary information in the production process. By collecting information on the production procedures, the organization is able to establish if the organization meets the necessary quality and ethical standards are met. Any form of compromise on the key performance indicators is established early in advance for necessary action to be taken (Poppo, 2014).

The terms and conditions also allows for the inspection of goods during the production process, before they are packaged and when they are delivered. Inspection and teasing during the production process ensures that the right materials are used and that the processes are effective. The goods are also inspected before packaging to ensure that only products of high quality are packaged and also after delivery to ensure that they are in the right condition. The terms and conditions as such enables the organization to ensure that the suppler is effective enough and guarantees delivery of quality products which is a key performance measure. This provision also ensures that the organization does not have to wait until the supplier fails to deliver based on the performance measures in order to raise alarm. The organization may notice weaknesses in the production process where it will be in a position to raise the issue early in advance to avoid delivery of goods that do not meet the set standards (Gray & Handley, 2015).

The organization will be able to give feedback to the supplier on the assessment made in a professional and constructive manner. This applies in the cases where it feels that the supplier is not in line with the performance measures either as a result of compromise on quality, timeliness, ethical issues or any other concerns. In this way the two parties are able to work together to come up with the necessary changes to ensure that the supplier is able to function in line with the performance measures.

The terms and conditions clearly outlines the consequences of the supplier failing to meet the performance measures of the contract. It cites for instance the penalties that are to come about as a result of failure to deliver the right goods at the right time where he has to pay for the damages caused. This also applies to the liability for damages arising from ethical issues. Other consequences include the termination of contracts as a result of default by the supplier or failure to meet the performance measures. The consequences that are outlined in the terms and conditions makes it possible to manage the supplier in order to ensure that they meet the performance measures under the contract (Poppo, 2014).

Gray, J. V., & Handley, S. M. (2015). Managing contract manufacturer quality in the presence of performance ambiguity. Journal of Operations Management, 3841-55

Heim, A. F. (2008). Guide to service subcontract terms and conditions. Chicago: Strategic Alliances, Teaming and Subcontracting Committee, Section of Public Contract Law, American Bar Association

Lawson, R. G. (2011). Exclusion clauses and unfair contract terms. London: Sweet & Maxwell

Nagle, J. F. (2006). Administration of government contracts. Washington, D C: George Washington University, National Law Center, Government Contracts Program

Oliver, R. W., (2008). Terms and conditions of contract. Ascot: Institute of Purchasing and Supply

Poppo, L., (2014). Managing Contracts for Fairness in Buyer--Supplier Exchanges. Strategic Management Journal, 35(10), 1508-152

Shahar, O. (2005). An Ex-Ante View of the Battle of the Forms: Inducing Parties to Draft Reasonable Terms. International Review of Law & Economics, 25(Conference on Commercial Law Theory and the Convention on the International Sale of Goods (CISG), 350-370

Steensgaard, K. (2015). Battle of the forms under the CISG - one or more solutions? Internationales Handelsrecht, 15(3), 89

Thorpe, C. P. (2009). Commercial contracts: A practical guide to deals, contracts, agreements and promises. London: Kogan Page

Walter, W. S. (2001). Sample terms and conditions of printing contracts for California. Los Angeles, CA: Associations of the Printing Industries of California