Managing Key Supplier Responsibilities Part III

Editor’s Note: This is the third of a four-part series written by Thomas Keenan and Geofrey L. Master, Mayer Brown JSM.

A manufacturer’s lead time is the time required for the manufacturer to deliver products from receipt of a customer’s order. Shortened lead times allow the customer to lower their inventory levels, offer faster response times to the companies’ customers and be more responsive to “drop in” sales opportunities. Manufacturer lead times are typically dictated by production line availability and the amount of time it take in all the necessary in all component materials.

Services level refers to metrics for the measure of performance, such as the percentage of product delivered to the customer (or their carrier) on the agreed purchase order delivery date. This ability to measure performance is very important when the customer faces a “back-to-back” purchase order from their end-client that include a narrow shipping window and potential late delivery penalties.

Manufacturer delivery key responsibilities can be dramatically improved through use of tools such as “ship-to-stock” rather than “ship-to-order” production and inventory systems. Under the “ship-to-stock” system, the manufacturer maintains pre-agreed levels of inventory for certain products at all times. These provisions give the manufacturer the freedom to build product when labor is underutilized—thus avoiding overtime costs for workers during peak periods—and deliver product to the customer the day after receiving the purchase order at potentially much lower cost. Contractual provisions providing these mechanisms must be carefully developed in advance and built up over time as the customer and manufacturer get to know one another and product life cycle-related volumes are taken into account.

If ship-to-stock provisions are not practicable, alternative contractual assurances such as liquidated damages clauses for late delivery and “service level” credits for early delivery on demand may provide important customer protections to assure service performance. Leveraging a wide range of service level practices and techniques borrowed from service outsourcings can provide effective management tools for the manufacturing relationship.

Product quality measures the extent to which products that are delivered to the customer according to pre-agreed product specifications. With the close integration of the manufacturer in the product development process, responsibility for materials, workmanship and design can be become blurred. It is important that sourcing agreements take into account these three key drivers of total product quality and assign responsibility for each of them.

Effective agreements must provide an effective specification modification process (Engineering Chang Notice or ECN). In the event that a product is found to be defective, either in the warehouse or during distribution (even halfway around the world from the place of manufacture), the customer should maintain a range of quick and efficient options that include both personnel and financial backing from the manufacturer. Product-quality provisions should set thresholds for acceptable returns and epidemic fault and provide solutions for those products that are found to be defective in the field.

Finally, product liability insurance and appropriate indemnity obligations can serve as important tools to give the customer needed protections, especially on a back-to-back basis for market liabilities connected to product quality.

Geof Master
As a partner in Mayer Brown JSM’s Business & Technology Sourcing practice, Geof Master has broad experience in sourcing transactions, including the outsourcing and offshoring of information technology and services as well as of business processes. He can be reached at .(JavaScript must be enabled to view this email address).

Tom Keenan
Tom Keenan is a Registered Foreign Lawyer (Victoria, Australia) of Mayer Brown JSM. He can be reached at .(JavaScript must be enabled to view this email address).