Friday, November 21, 2008

Do You Need a Supplier Contract?

No. If everything is going really well, and always will, then don't bother. You, my friend, are an enlightened master, but you don't need me to tell you that.

For the rest of us, likely you do. There are scores of articles about how to source product from low-cost countries. I've written several myself. I usually dance around the topic of contracts, and am even uncertain about what to tell my clients. I do have experienced legal advisors that I trust, and I count on them to help me figure these issues out.

Let me give you a couple of scenarios, one with a contract, one without. Please do seek legal advice before you finalize a sourcing project. As the old saying goes, an ounce of prevention is worth a pound of cure.

Scenario 1: I source a small stainless retaining clip. The value of the clip is a few pennies. The mould only cost me $200. My staff performs QC checks prior to each shipment, and I buy sufficient quantity to cover 90 days of supply. My relationship with this vendor is great, and I've used him for a couple of years. I also know that I could likely move this project to another vendor in less than 90 days, and that my mould cost will be less than $1000. I have no contract, but do issue detailed purchase orders with each order. I'm comfortable with this arrangement.

Scenario 2: I work with a partner to source a large aluminum casting for the automotive industry. The cost of the mould and tooling was over $30,000. The part is complicated and we ship monthly. Of course, relationship and VERY pro-active project controls are necessary. My risk, however, is tremendous if there is a problem. I certainly need a contract on this one!! If things go wrong, I will need to recover the tooling, which my partner and I own! I'll need to recover damages, as I would likely miss shipments if I needed to move the project. With the right team, legal remedy is possible in China.

The last contract that I worked on in China cost about $4,000. Expensive, yes, but if your tooling costs $30,000, it's worth it. If you don't include vendor disagreements as part of your failure mode and effects analysis, perhaps you should. The corresponding process control could be a well-written, enforceable contract.

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