Disclaimer: I am not an attorney and cannot give legal advice. This series is from a supply chain practitioner’s perspective on negotiating contracts and is simply offering my perspective on common contract clauses. Seek professional legal advice for your own contracts.
In our continuing series on contract clauses from a supply chain perspective, last week we talked about the compliance and purchase order clauses (and I told a quick story about how one of my suppliers lost $2m in annual sales over a compliance clause). This week we will talk about forecast clauses and delivery clauses. I only started dealing with the forecasting clauses recently – they can really be your ticket out of post-COVID lead time craziness and are often skipped in modern contracts (but shouldn’t be!).
The example contract clauses and discussions of them below are separated by horizontal dividers to help you switch between them.
Forecast Clauses
7. FORECAST
7.1 Provision of Forecasts. Seller agrees to work with a rolling twelve (12) month forecast provided by Buyer within the Ordering System and/or EDI 830 to manage its build schedule and/or inventory and shall accommodate fluctuations in the forecasts to ensure an uninterrupted flow of Products to Buyer within the Lead Time required.
7.2 Forecasts not Binding. Any quantity estimates or purchase forecasts not specifically transmitted in a Purchase Order are for planning purposes only and do not constitute an order for any Product. Forecasts, whether communicated formally or informally, are not purchasing commitments and do not bind or obligate Buyer in any way.
7.3 Uninterrupted Flow of Product. Seller agrees to use Buyer’s twelve (12) month rolling forecast to determine on-going Product delivery quantities to Buyer in order to ensure an uninterrupted flow of Product to Buyer. In the event that market demand is greater than Seller’s production capacity, the Parties agree that Seller may, following notice to Buyer, place Buyer on allocation. In this event, Seller agrees to provide to Buyer 100% of Product for all Purchase Orders issued within the Lead Time as defined in Exhibits A and B. Seller also agrees to provide a minimum of 90% of the remaining twelve-month rolling forecast to Buyer.
This set of clauses is intended to clearly outline how far out the Buyer will provide a forecast, how the forecasts fit with contract obligations, and how the Seller is supposed to use them. The first clause outlines the basics of how this forecast will be run. In this case, it was used by a manufacturer working toward high volumes and an integrated electronic data interchange (EDI) system.
Side Note: I always think of EDI as the way two enterprise resource planning (ERP) systems “talk” to one another. The buyer’s ERP sends an EDI signal to buy something to the seller’s ERP, and the seller’s ERP sends back an EDI signal acknowledging and confirming. They’re fiddly and require EXACT matches (no extra spaces, identical punctuation), but when they work they require no human interaction and are very slick. When people talk about AI in the supply chain, I think about EDI integrations and chuckle. Similar to AI, the setup effort required is surprisingly large and takes surprisingly long to get it right. But back to our forecast clause.
EDI 830 is one EDI signal used to communicate forecasts, and requires systems sophisticated enough to provide and receive those signals. The actual communication method is irrelevant to negotiating this clause, find the right signal and delivery method for you that takes the minimum amount of effort to maintain.
The next clause (7.2) notes that forecasts are not binding. If the buyer is using forecasts to project volumes, it’s very important that this clause exists, unless you are very sure you want forecasts to be binding. If forecasts are binding on the supplier, they are no different from purchase orders and should be treated as such (meaning they are also binding on the buyer).
The last clause in this section (7.3) outlines supplier obligations. This is where the post-COVID contractual protections come in. While it is in no way a guarantee (suppliers can always simply not supply and break the contract in another COVID), these kinds of clauses are becoming more common. Negotiation points here are in the timeline of the forecast and the percentage of guaranteed supply to that forecast. Note this is also a point where the contract is holding the supplier to the lead times in Exhibits A and B.
Delivery Clauses
8. DELIVERY
8.1 Packaging and Shipping. Seller shall pack and label Products, including all bar coding on packages and shipping notifications in accordance with Buyer’s requirements as referenced in Buyer’s “then current” Supplier Manual, and make shipments (including Saturdays, Sundays and holidays, as may be requested by Buyer from time to time) in accordance with Buyer’s shipping instructions as set forth in Buyer’s third party logistics shipping instructions (“Shipping Instructions”) which can be requested from Buyer, which Shipping Instructions set forth, among other things, mode of transportation, use of assigned carrier and identification of the shipping point. Unless otherwise stated, Product shall be shipped DDP (Incoterms 2020). Each packing slip and bill of lading shall bear the applicable Purchase Order number and the location of the site to which the Products are to be shipped. Seller shall be responsible for all excess shipping costs incurred by Buyer, due to Seller’s failure to comply with the Shipping Instructions. Title and risk of loss to all Products shall transfer to Buyer upon delivery by Seller at Seller’s dock, unless otherwise provided in the Purchase Order. If, in order to comply with Buyer’s required delivery date, it becomes necessary for Seller to expedite shipment and ship by a more expensive method than that specified in the Purchase Order or the Shipping Instructions, Seller shall have the right to select the carrier and shall pay any increased transportation costs, unless the necessity for any such rerouting or expedited shipping and handling has been directly caused by or is directly attributable to Buyer.
This clause is about the nuts and bolts of shipping, and isn’t always found in contracts. In this case it refers to a separate document outlining shipping instructions, allowing that separate document to change more frequently than the contract. If desired, those instructions could be put into the contract directly as either an exhibit or in the text here. In this case, the contract also calls out some of the logistics requirements.
One of the key pieces in this clause is calling out Incoterms. Incoterms are at the heart of logistics and call out at what point goods transfer from the seller to the buyer. In this contract, the default terms are DDP, which puts as much responsibility on the seller for shipping as possible. Note that Incoterms do not call out who pays for logistics, simply who is liable for the goods at what point in the journey. Lastly, this clause calls out the rules for expediting when a supplier needs to do so due to their error. Most of the edits I see in this clause have to do with changing Incoterms, and it is unusual for a supplier to touch the rest.
8.2 Certificates. Seller agrees to provide United States Mexico Canada Agreement (hereinafter “USMCA”), Disadvantaged Business Enterprise (hereinafter “DBE”), and Buy America, certificates of origin as required by Buyer. Buyer’s standard practice is to request USMCA, DBE and Buy America certificates for any new Product awarded to Seller and to request annual recertification for all Products previously awarded to Seller.
8.3 On-Time Delivery Requirements. “On-time Delivery” means Seller delivers the applicable Product to Seller’s dock per Buyer’s Purchase Order with zero day’s delay and no more than seven (7) days before the confirmed delivery date. In the event Seller ships Product to Seller’s dock more than seven (7) days early, Buyer’s payment terms will be linked to the original Purchase Order date and not the date of receipt and acceptance by Buyer at Seller’s or Buyer’s dock. Any partial shipment of Products will be deemed late if the remaining portion of the shipment is not delivered by the due date and may be rejected by Buyer at Seller’s dock. Seller shall use its best efforts to maintain a ninety-eight percent (98%) On-Time Delivery rate in any consecutive twelve (12) month period. If Seller has additional late deliveries to Buyer, Seller shall pay to Buyer a penalty in an amount equal to one percent (1%) of Seller’s total calendar year sales of Product(s) which will be debited by Buyer or offset from amounts due Seller. This payment is in addition to any other remedy Buyer might have because of Seller’s failure to deliver Products on time. Except as otherwise provided in Sections 8.4 and 8.5 with respect to advance shipment of Service Products, if Seller ships Products to Buyer in advance (more than three (3) days too early), then Buyer has the right to reject the shipment and ship Products back to Seller at Seller’s sole cost and expense.
The first of these clauses (8.2) talks about providing certificates for requirements such as Buy America. Programs like Buy America, Disadvantaged Business Enterprise, and others have very loose requirements from the US government, and haven’t been challenged enough in court to have defined documentation. Often it’s a bit of the Wild West for documentation with every company deciding differently how much of a “certificate” is really needed to cover the requirement.
The second clause (8.3) talks about on-time delivery. We talked about this in the article on perfect orders, and each company has different definitions of “on time”. Allowing suppliers to deliver parts too early means the buyer has to pay to store that part until it is needed. While it may seem like a great idea to have parts delivered early, it increases inventory and ties up cash to do so. This is also where the contract puts “teeth” in late deliveries. Telling a supplier to deliver on time in a contract is difficult to enforce and neither incentivizes nor disincentivizes them to perform. So in this case continued late deliveries carry a penalty as a percentage of their total sales for the year. If you can get a clause like this into your contract, it can be very helpful toward making sure the contracted lead times don’t creep out over time and that the supplier works to meet the requirement. Alternatively (or additionally), you could offer an incentive for suppliers who consistently deliver a high percentage within the on-time window. Every clause in a contract should be enforceable, but if you have to dissolve the contract to enforce the clause, you may be in a worse position than you started. A supplier who is delivering late might be preferable to no contracted supplier, so think about the terms that make more sense than simply canceling the contract as a consequence.
8.4 Advance Shipment of Service Products. Notwithstanding any other provision to the contrary, Seller is authorized to ship Service Products set forth in Exhibit B early to Buyer.
8.5 Consequences of Late Deliveries. If deliveries are not made in accordance with the delivery date specified in the Purchase Orders, and there is a production slow down or stoppage for either the Buyer or its customers due to late delivery of the Products, Seller shall promptly, upon request, reimburse Buyer for all reasonable costs, losses, penalties, and expenses incurred therewith.
8.6 Exceptions for On-Time Delivery Requirements. Buyer agrees that late deliveries due to Force Majeure Events, Purchase Orders placed with less than standard Product Lead-Time, requirements materially exceeding Buyer’s forecast requirements, or any other reasons not attributable to Seller’s fault or negligence, shall not be used to calculate Seller’s On-Time Delivery performance.
8.7 Anticipated Potential Delivery Disruption. Seller will notify Buyer of any labor contract expiration date at least six (6) months before the expiration of a current labor contract that has not been extended or replaced. Seller will notify Buyer of any change in Enterprise Resource Planning (ERP) system at least six (6) months before the new system go-live date. Buyer may thereafter direct Seller in writing to manufacture up to thirty (30) days of additional inventory of Product, specifying the quantities of Product required and any packaging and storage requirements. Seller will use commercially reasonable efforts to comply with Buyer’s written directions prior to expiration of the current labor contract and until the current labor contract has been extended or a new contract completed. By authorizing the additional inventory, Buyer commits to buy the entire quantity of conforming Product requested and produced. Seller is responsible for carrying costs and any additional costs of manufacture.
These last few delivery clauses continue the details of the delivery terms. The first one (8.4) simply ties the products in Exhibit B more tightly into the contract. The intent of this clause is to avoid suppliers shipping things not on the exhibits, if that is an issue for you. This clause may or may not be very necessary for your business.
The next clause (8.5) establishes liability if the supplier causes a production stoppage or slow down. This one is hard to enforce, especially if multiple suppliers cause a production slow down, so it may or may not be useful. While it seems like a good idea and is good to leave in a template, consider striking it to gain back a clause you care more about elsewhere if needed.
The next clause (8.6) discusses the requirements on the buyer to allow the supplier to deliver on time, and is one of the rare clauses written in the supplier’s favor. Because of that, it is rare to see edits to a clause like this one, and it can be helpful for relationship clarity.
The last clause (8.7) is about predicting the suppliers’ bad days. ERP implementations, labor contract negotiations, and similar events are predictable sources of supplier disruption. Requiring the supplier to alert you about these upcoming issues can help you save your business by letting you “stock up” on material ahead of the event. While we all would like to think our ERP implementations will go smoothly and our labor contract disputes will be nonexistent, that is seldom how the world goes. Require your suppliers to give you enough warning before these predictable events for you to plan.
That wraps up this week’s deep dive into contracts, next week we will talk about non-conformance, inspection, and payment. If you’d like to talk to me about your company’s contract clauses, schedule a time to chat.