1.1.1 Introduction
1.1.2 Sources
1.1.3 Source Policy
1.2.1 Introduction
1.2.2 Vendor Rating
1.2.3 Negotiation of the Agreement
1.3.1 Supplier Partnerships - Production Control
1.3.2 Supplier Partnerships - Internal Communications
1.3.3 Supplier Partnerships - Supplier Base Reduction
1.3.4 Supplier Partnerships - Supplier Scheduling
1.3.5 Supplier Partnerships - Technical Communications
2.1 Order Placement
2.1.1 Introduction
2.1.2 Invitation to Tender
Competitive Tendering
Selective Tendering
Negotiated Tendering (PTN)
2.2 The Contract
2.2.1 The Law of Contract
Certainty of terms, estoppel & parol agreements
2.2.2 Contractual Terms
representations and misrepresentation
express terms
implied terms
conditions
warranties
exclusion clauses
2.2.3 The 'Battle of the Forms' (whose contractual terms are to prevail?)
2.2.4 Termination of the Contract
Frustration
Force Majeure
Mistake
Breach of Conditions
2.2.5 Remedies (Damages)
Liquidated Damages
Unliquidated Damages
2.3 The Carriage and Receipt of Goods
2.3.1 The INCOTERMS
EXW (Ex Works)
2.3.2 The Delivery of Goods
2.3.3 The Acceptance of Goods
2.3.4 Passage of Title
2.4 Status of the Goods
Specific goods
Unascertained goods
Bailments
Goods which have been processed
3.1 The Ordering Process
3.1.1 The Trail of Commercial Information
3.1.2 The Purchase Order
3.1.3 Progressing and Expediting
3.2 The Order Quantity to Minimise Cost
3.3 ABC Analysis and Bought-In Parts
3.3.1 How to Perform ABC Analysis
3.3.2 Managing the A, B, and C Class Items
3.3.3 Class D and the Two-Bin System
3.4 Buying Capital Equipment
3.4.1 Purchasing Membership of a Team
3.4.2 Leasing, Hiring and Hire Purchase
Leasing
Financial Lease
Operating Lease
Hire Purchase
Hire or Rent
3.4.3 Managing Stage Payments
4.1 Supply and Demand
4.1.1 Economic Theory
4.1.2 Market Distortions
4.1.3 Price Elasticity
4.2 The Buyer, Costs and Costing
4.2.1 Assigning a Cost to a Product
Accumulating costs & production cost centres
Allocating costs & 'prime costs'
Cost driver
Production Overhead
Prime Cost
4.2.2 Calculating Standard Costs
4.2.3 Budgets and Variances
4.2.4 The Breakeven Point
4.2.5 Alternative Types of Costing (Job, Batch, Contract, Process)
4.3 Prices and Large Contracts
4.3.1 Major Contracts and Fixed Price Agreements
4.3.2 Contract Price Adjustments (CPA)
4.3.3 Discounts
4.3.4 Budget Buying
4.4 The Cost of Technically Novel Items
4.5 Commodity Prices
4.5.1 Private Bargains and 'Physicals'
4.5.2 Commodity Futures
4.6 The Price of Foreign Purchases
4.6.1 Introduction
4.6.2 The Forward Market
4.6.3 Other Foreign Exchange Payment Methods
4.6.4 Exchange Controls Abroad
4.7 Effecting Foreign Payments (Letters of Credit)
4.8 Government Buying (UK)
5.1 The Supplier and SPC
5.2 Raw Material Quality - Inspection v. No Inspection
5.3 Incoming Raw Material Quality - Sampling
LTPD sampling tables
AQL sampling tables
Operating characteristic (OC)
5.4 ISO 9000 2000
6.1 Organisation
6.1.1 Support the Negotiators!
6.1.2 Centralisation v. Decentralisation
6.2 The Split in Purchasing/Technical Responsibilities
The Purchasing Job Remit
6.3 Measures of Buyer Performance
6.4 Ethics
6.5 The Chartered Institute of Purchasing and Supply (CIPS)
6.6 The Chartered Institute of Purchasing and Supply's Ethical Code
1.1.1 Introduction
"Sourcing" is the term used generally to denote the process of finding suppliers of goods and services specifically required by the company. As part of purchasing research, it can also mean finding suppliers of goods and services which may one day be useful and which may therefore point the way to new avenues of product development.
Before the investigation begins, the purchaser must be fully aware of the relative importance of the product in relation to three factors ...
I. Strategic Material Position
'Strategic' - These might be bulk raw materials such as oil, crops, widely used metals (copper, borax ...) and even complex, expensive sub-assemblies such as engines. The sourcing of such purchases is a major task, since the end result is of such vital importance to the company. Price, reliability of supply, continuity of supply and quality are likely to be predominant. 'Mainstream' - Typically, these are materials required for the production of the company's main products. Sourcing policy may take comparatively more account, say, of the logistics of supply than other facets such as price or continuity.
II Quality and Improvement
How important is it that the material being delivered should be, literally, 100% conforming? If the material is to be used in production directly on receipt, this importance may be paramount. In which case sources of supply will be confined either to companies having SPC programmes or to companies willing and competent to start them. If it is relatively cheap and easy to inspect incoming supplies, quality requirements might be relaxed if sources indicated a compensating advantage. In addition to physical quality itself, the supplier with a TQC programme is also expected to show continual improvement in quality and, through the evidence of a "sufficient" R & D budget and an on-going commitment to improved design and capability.
III Delivery Logistics
'Constant Deliveries' - External supplies used constantly in large numbers, indicating that sources should if possible be physically close at hand and capable of reacting quickly to change. 'Batch Deliveries' - Deliveries should be timely, if only to reduce stockholding and enable adherence to the production schedule. Nevertheless, the stock delivered is for several discrete production runs over many days or weeks. Sources need not be close and might even be overseas.
Clearly, not all sourcing merits the same time and attention. The buyer should carefully consider which items are critically important.
1.1.2 Sources
When the criticality of the material or service warrants it, it is important that the buyer should put behind him the temptation to turn to a familiar but unduly limited group of suppliers and, instead, search the whole supply marketplace. Sources of information relating to products are given below. As well, as stated above, it should also be said that a mark of a good buyer is that he should maintain and foster a large circle of personal contacts among suppliers.
(a) Catalogues (including those by merchant distributors)
(b) Trade Journals and Magazines
(c) Trade Directories. An example is the 3-volume directory Kompass, which has a product classification system that enables the purchaser to determine sources from an extensive but not exhaustive list of UK companies. Other directories are Dun & Bradstreet's Key British Enterprises, Kelly's, Ryland's and Buyer's Guide.
(d) Yellow Pages and Industrial Yellow Pages. Yellow pages give the phone numbers of city and district firms by trade classification. The Industrial pages give major industrial groups by UK region.
(e) Sales Representatives
(f) Exhibitions. Attendance at exhibitions by purchasing staff should be a methodical affair with careful filing afterwards of the glossy leaflets and business cards.
(g) Foreign Sources. Searching for foreign sources is a specialised matter.A number of directories exist including Kompass, Jaeger & Waldman and the English language version of Wer Liefert Was?. Other sources include the commercial attachés of foreign embassies, the London Chamber of Commercial Information Department and the UK Trade and Navigation Accounts of UK imports.
Of overwhelming importance to the buyer nowadays however is use of the Internet. Use can be subdivided into two categories: (1) e-commerce, meaning literal buying and selling, and (2) the obtaining of information. The success of the world wide web in information gathering is proven and self-evident - it is here that the medium comes into its own. He is also able to search foreign sites through the automatic translation of text.
1.1.3 Source Policy
SOLE v. DUAL / MULTIPLE SUPPLY. A single supplier from whom a comensurately higher volume of material is purchased should lead to better prices, more easily monitored quality (provided all material is from the same physical place) and constant improvement in the product and product quality. In favour of dual or multiple suppliers, however, is that we have coverage of the risk of an interruption of supply and the fact that the supply marketplace is kept more competitive.
PREFERENCE FOR LOCAL SUPPLIERS. Supplies from local stocks may be desirable if the buyer's production programme is subject to very frequent change. (As well, use of local suppliers will help in influencing local authority officials.)
SMALL v. LARGE SUPPLIERS. A claimed and often valid argument in favour of small suppliers is that they are more pliant. They have - or should have - the internal flexibility to change, they may try harder, they may put themselves out. It is likely to be easier to build a close, lasting relationship with a competent small supplier than a large one. Large suppliers, however, are likely to be at the forefront of technological change and to pass advances onto their customers in the form of technically superior products.
RECIPROCAL BUYING. Reciprocal buying, or a policy of "reciprocity", means that the firm purchases from external suppliers which themselves purchase from us. Companies which sell products in a highly competitive market may deliberately seek to purchase required material from its customers as a 'hold' over them. If the market is indeed competitive, it may mean there is little product differentiation except for price, so that the extra leverage is welcome. Deliberately entering into agreements for this reason has many dangers, however, and is, not surprisingly, unpopular with purchasing professionals. By definition it restricts buyers' freedom of action (eg if bad quality is sent) and may result in greater internal loss when the all-round picture is seen rather than just price. The normal circumstances of reciprocity is the purchase of goods within a large, diverse company. Company X of the ABC Conglomerate PLC must buy from Company Y, also within ABC. ABC here consists of limited companies and operating divisions put together with inter-company purchasing very definitely in the corporate strategist's mind. The buyer may be required to source from within the group if at all possible. The arrangement is very rarely beneficial - (internal) suppliers become uncompetitive and inefficient.
1.2.1 Introduction
Vendor appraisal is the assessment of potential new suppliers before any decision is made to place an order or enter into negotiations with intent to do so. The depth of the process will self-evidently depend on the importance of the materials to be bought and the value of the business. The Pareto 80:20, or ABC rule, rule applies here - that is, 20% of the materials bought will merit 80% of the effort allocated to appraisal.
Desk Research
The supplier is informed that his company is to be evaluated with regard to the particular material or service required and written information is requested of him. The information requested should always include the company's principal financial documents, including the annual report, balance sheet and profit & loss account ... It may also include the company magazine, product brochures, price lists and other literature. In addition, it is the experience of company purchasing managers who ask vendors to disclose cost information, that they are generally willing to do so, or at least will disclose information in the closing stages of a sale and when long-term business is at stake.
Field Research
Stage 2 of vendor appraisal is field research. It consists of one or possibly more visits to the supplier by a company team, including the purchasing representative, in order to assess the technical abilities and managerial standards of the firm. Team members besides purchasing may be from production, quality assurance and engineering departments. The visit itself will consist of a factory tour and office discussion afterwards, with the opportunity to talk to and question shop floor operatives, other employees and key top managers. Areas for assessment include the following:
(a) Plant and Machines: The modernity of the plant and machine tools and whether they are well-maintained. The existence and adherence to a strict programme of planned machine maintenance.
(b) Planning and Control: Whether the vendor has effective control over his manufacture through the effective use of such planning systems as MRPII, MRP and JIT. The accuracy of the stock records is a good indicator of ability.
(c) Quality Capability: The employment of SPC (see Section 5) by operators in the production process. The team should expect to see, and should examine, control charts in use. Evidence of the operation of a TQC system throughout the factory should be forthcoming from noticeboards and office charts. Further evidence of TQC is the conduct of a programme of continuous product improvement by the methodical analysis of causes of variation and their elimination one by one.
(d) Shop Floor Technical Expertise.
(e) Meticulous Housekeeping.
(f) Technical Superiority.
(g) Service and Support: Whether the company appears well organised with regard to field service such as installation support, routine follow-up and response to emergencies. Keenness to assist.
(h) Company Commitment: By the end of the visit the team should be able to assess the 'commitment' of the company - ie of the company's personnel - to good customer service.
(g) Standards of Management : The most important element is the commitment, competence and expertise of the supplier's management. These attributes will, of course, be manifest in the factors (a) to (h) above. If our own company is to enter into a close, long-lasting relationship with a supplier, it is important to be as sure as possible of the business and moral integrity of that supplier's management. There are many who regard this last point as the most important of all in the assessment of a potential vendor.
The collection of information on a field visit is normally made on a standard company form. There are as many possible versions of this as there are companies. Many are two-part forms, Part 1 referring to basic facts to be noted on the visit itself and which are indisputable (eg address and telephone number). Part 2 is filled in immediately after the visit, is somewhat judgmental and is highly confidential - for example, personal assessments of the attitude of managers, the state of the factory and the supplier's operational systems. The forms in practice might contain additional material to enable them to do double duty in vendor rating (see next).
1.2.2 Vendor Rating
Vendor rating means the comparative assessment of one vendor with another, typically as the result of vendor appraisal. Vendor rating is distinguished on this on-line course from supplier performance rating dealt with below in sub-section 4. The purposes of vendor appraisal and vendor rating are in many respects an attempt to discern what the performance and performance rating of the vendor would be if he were selected as an actual supplier. One method of vendor rating is to use a quasi-quantitative scoring technique based on weights and marks that works as follows:
(i) Formulate a Standard List of Vendor Criteria
A list of (say) 50 criteria and questions is devised, in which activities and attributes are formulated which are believed to be general and relevant for judging all potential suppliers. Examples of questions are: * The maintenance of accurate records of stock; * The existence of an in-house equipment calibration programme; * The ready accessibility of latest technical drawings; * The installation and use of SPC; * The adoption of Total Productive Maintenance (TPM); ...
(ii) Weights to be applied to the Standard Criteria
The evaluation team must now assign a 'weight' of importance, from 1 to 10, to each of the criteria on the standard list in (i) above to denote its perceived importance. For example, 'Criterion 1' may have a weight of importance of 6 out of 10, whereas 'Criterion 4' has assigned to it a weight of 9 out of 10.
(iii) Vendor Marks
Each vendor being evaluated is voted a mark from 1 to 10 for each criterion, the size of the mark depending on how well the evaluators think he, the vendor, performs, or will perform, the function involved. The mark out of 10 is irrespective of the weight assigned to the question. Thus vendor Smith & Brown may get a mark of 5 out of 10 for 'Criterion 1' and a mark of 6 out of 10 for 'Criterion 4'.
(iv) Rating
Each supplier's mark is multiplied by the corresponding criterion weight to produce a criterion "score". Thus for Smith & Brown and 'Criterion 1', the figures are: weight 6, mark 5 ... score 30. Scores are totalled to give a grand vendor score. The vendor with the highest grand score is deemed the best.
The result of vendor rating in conjunction with specialised technical assessment for a new buy or modified re-buy is likely to be a decision to purchase the material required - the buying decision is dealt with in Section 3 below. Even though only one or two suppliers get our business, many of those not chosen may still have scored most satisfactorily. In short, a result of vendor rating is perhaps not simply "chosen/not-chosen" for a specific new contract, but the classification of all evaluated vendors into four classes: Class A - Approved and Chosen Supplier; Class B - Satisfactory Vendor; Class C - Vendor in Emergencies only; Class D - this vendor not to be used Suppliers, of course, change so that lists developed in this way are soon not only voluminous but also out-of-date. If they cannot be fully maintained, they should be regularly purged, but the original paperwork should be archived to assist in any new, later vendor evaluation.
1.2.3 Negotiation of the Agreement
After due assessment of vendors and products, a decision is made that, subject to a number of points to be discussed, a particular vendor is to become the supplier. If the product is one on which the annual expenditure will be relatively small and the quality/delivery is not critical, or is well-known to be satisfactory, the supplier will doubtless merely be informed by letter or even by the sending of a purchase order for goods, without comment. Otherwise, the supplier will be approached with a view to coming to a mutual agreement as to the terms of supply - price, delivery standards, engineering support, quality levels .... The discussion on such matters between supplier and purchaser is known as a negotiation - a discussion between buyer and vendor intended to produce an agreement, and over which either party has the power of veto. The issues of negotiation will, of course, be different depending on the type of agreement the company intends to reach with the supplier. In particular, if the purchaser wishes to establish his variant of a 'suppler partnership' with respect to the supply of a product, rather than to negotiate merely the plain product price, he may prefer to discuss with the supplier a method of arriving at a price by reference to some costing formula. Negotiations such as these emphasise the modus operandi between the two companies, and can be protracted and complex. When concluded, however, they enable other ventures and purchases between the two firms to be proceeded with quickly and easily. Consent to the final agreement of terms and conditions is, from the definition in red text above, voluntary. But the negotiation itself is not about 'equity' or `fairness', for the simple reason that the two sides have opposing assertions and opposing aims. The supplier has a warehouse full of 12v engines and wishes to replace them with money. The buyer has money and wishes to spend some of it on 12v engines. The supplier's assertion is that one 12v engine (his) is worth £10 (the buyer's). The buyer's assertion is that £6 (his) is worth one 12v engine (the supplier's). Before outlining the normal steps taken in a negotiation, it will be realised that the majority of issues to be settled as part of the final agreement are of a non-contentious nature. The product itself has already been assessed and selected. Details on payment procedures (cheque or BACS method) may have to be settled but are of little real consequence between two firms that are used to trade. In purchasing negotiations, therefore, if not in political or wage bargaining ones, it is possible from the outset to build on these areas of agreement by a collaborative approach. Indeed, a collaborative approach is likely to be essential if the purchaser needs heartfelt, genuine effort in the future from the supplier to meet quality standards and delivery dates. Yet it is also possible for the purchaser to adopt a confrontational approach. By this, the buyer attempts to impose his view about price typically by taking a provocative or abrupt stance, perhaps threatening to break off the discussion if his demands are not met. The steps of negotiation are outlined in the following text, and are covered comprehensively in the separate free on-line course at this Internet site. The negotiation steps are:
Pre-Negotiation: Supply market research of the type covered above;
Meeting Preparation: Deciding on the stance to be taken with the supplier - collaborative or confrontational etc - and the tactics to be used to persuade him that our assessment of price and conditions is the correct one;
Meeting Introduction: Establishing the atmosphere and perhaps recapping on points on which there is no disagreement;
Meeting Discussion: The issues in the negotiation are aired - the supplier's as well as our own. The stance or position of each party becomes apparent. Deceit and quarter truths are endemic in negotiation. It is very common for one side or the other to use a tactic to get his way - a tactic is, essentially, the spinning of a story, or lie, intended to place the opponent in a difficult or impossible position. For example: We cannot pay more than x because there are no more funds left in our budget;
Meeting Agreement: This sub-stage of the meeting is where the specific agreements are made between supplier and purchaser. Variations from the opening stances are known as concessions. For example, suppose that seven of the supplier's standard conditions of sale as printed in his catalogue for the purchase of a machine are: £100 per annum maintenance; 6 months free warranty and the supplier delivers the machine to the purchaser's factory. What is finally agreed, however, is as follows: £90 per annum maintenance; 12 months warranty, and the buyer collects the machine from the supplier's factory. Post-Negotiation: Remember that the written, signed agreement takes precedence over anything that was said or verbally agreed;
1.3 Supply Partnerships
The company's own progress in materials control and the enhancement of quality is likely to be undermined if external supplies are not incorporated. Suppliers must fit into the company's logistical picture, incoming material must be free of non conformancies and what is supplied must to subject to constant improvement. In order to bring these matters about, purchasing professionals are charged with the task of creating so-called close supplier relationships, or supplier partnerships agreements, through which suppliers accept the need to fit into their customer's new environment. Partnerships then can be considered under three broad headings: 1. Logistics; 2. Quality Assurance; and 3. Product Improvement. The five steps necessary to create a supply partnership from the viewpoint of logistics are set out below.
1.3.1 Supply Partnerships Step 1: Production Control
A formal company planning system must be installed within the company, based on the creation and on-going management of a master production schedule (MPS). The master schedule is recreated monthly, taking into account revised forecast sales and the capacity needed to support the required production. The actual mechanics of creating material and purchase plans needed to support the MPS may be by MRP or through an APS System. Whichever of the techniques is employed, purchase plans are created and adjusted in precisely the same way as manufactured material plans. Planning systems such as these are large and difficult to implement. But purchasing should not move forward into the world of supply partnerships until its chosen planning and control method is working satisfactorily (that is, in its own company.)
1.3.2 Supply Partnerships Step 2: Internal Communication
A close working arrangement must be created between purchasing, production control and production, typically overseen by the company's master production scheduler. The crucial data produced by the planning system consists of due dates and quantities. Purchasing must under-stand the need for precision on these matters and work closely with others in the firm to overcome possible problems. Typical problems arise when plans change, causing shifts in purchase order requirements, and when capacity constraints are discovered. Essentially, the internal communications step requires a number of purchasing staff to become schedulers (not expeditors). In many companies, a number of buyers have been transferred from purchasing to a separate scheduling section within the production control department.
1.3.3 Supply Partnerships Step 3: Supplier Base Reduction
One reason for pursuing a supply base reduction programme is that the closeness of the collaboration needed between buyer and supplier, especially with regard to help and involvement in the supplier's quality programme, is so time consuming that it would not be feasible to support a large 'traditional' supplier base. A second reason can be found in the practice - and spectacular success - of Japanese Just-in-Time supplier co-operations. Examples of the supplier base reductions in Just-in-Time environments that have been achieved in just a few years by American companies include: Control Data Corporation, St Pauls, from 900 suppliers to 280; Xerox Reprographic Inc from 5000 suppliers to 300; and IBM Typewrier Division from 640 to 32.
1. Set up a controlled register of suppliers (which is initially empty);
2. Clean up and slim down existing suppliers before transferring them to the Register.
Software to assist in the cleaning up process was referred to as Component Supplier Management (CSM). A CSM package that was widely used and well-spoken of is available from software house Aspect Development, California.
1.3.4 Supply Partnerships Step 4: Supplier Scheduling
The first and most difficult task in this major step is to ensure that suppliers are indeed capable of responding to changed needs on a frequent basis. This will entail, among other things, the purchaser giving help and education so that the supplier's MPS programme dovetails with the buying company's own needs. The least satisfactory solution, but probably the most common initially, is for the supplier to hold a safety stock buffer. With MRP systems, it is not uncommon to agree to three supply "zones of change" as follows: Freeze Period : The purchaser is not allowed to make any change to plans in this period. The supplier must send material precisely in line with the stated needs. The freeze period may be from 'now' to day 3 ahead inclusive. Semi-Freeze Period : The supplier may manufacture product in this period, though he cannot despatch it until the required date. The purchaser can change plans in the semi-freeze period, but must compensate the supplier for any losses due to cancellations. The semi-freeze period may be from day 4 to day 7 inclusive. Unfrozen Period : Changes may be made freely. The purchase plans in this period may be from (say) day 8 to week 6 to assist the supplier in his own scheduling.
1.3.5 Supply Partnerships Step 5: Technical Communications
EDI stands for electronic data interchange, and is one means by which purchaser and supplier can swop information. It refers to data sent by transmitter or data cable through a so-called value added network, or VAN. The VAN can be regarded as a network of computer 'post offices'. That is, the network subscriber who wishes to send data dials into the system and transmits the data, including the (electronic) address of the intended recipient. The message or data is directed to a computer close to the recipient's geographical address. The recipient accesses his local VAN computer on a frequent basis to see if any message has been sent to him, and, if it has, reads it into his own computer. In order to send via the network, it is necessary to follow strict rules relating to its electronic format, the rules being known as the protocol . The remaining technical issue concerns the software employed by the sender and recipient themselves to translate and interpret the information being sent and received. A number of 'EDI translation' software packages are on the market, such as Gentran. . Increasingly, the Internet is taking over much of the communications role of EDI - it is cheaper by far, and more versatile in the form of the data communicated.
1.4 Supplier Evaluation
Supplier Evaluation means the assessment of a supplier with whom we are actually doing business, rather than vendor appraisal - the assessment of a vendor with whom we might do future business. Supplier performance must be measured on an on-going basis as part of a robust, constantly-maintained recording system. To measure quantity and timeliness ("OTIF" = on time, in full), when an order is placed, it is entered onto the database and subsequent information relating to it is accumulated on the record as the activities relating to its progress are tracked. A marking system for supplier evaluation might record and assess 'Kaizen', cost, OTIF, quality, progress in value analysis, invoice conformance, packing, .... many aspects of the performance of the supplier relevant to the buying company.
1.5 Value Engineering and Supplier Value Analysis
The term value engineering means the consideration of new products under design. Purchasing's role in a multi-disciplinary internal team here is (1) to advise on the state of the supply marketplace, and (2) to note carefully the points required of any new materials to be bought in, so that the company's best interests can be protected in the eventual negotiations which he conducts with the chosen supplier. Value analysis, by contrast, is the term used for the study of a product or material, already part of the company's product range, in terms of its components, functions and constituent costs. The objective is to eliminate or re-specify all constituents of it which add cost but contribute no useful function. Again in company teams, purchasing has a role similar to its role in value engineering. However, the study of bought-in parts in terms of value analysis must of necessity be conducted by suppliers themselves. Here, importantly, purchasing have the tasks of (1) ensuring suppliers conduct vigorous and worthwhile value analysis programmes, and (2) monitoring the results and directions emanating from these programmes.
Two ways in which a supplier's order might originate have already been described, the first being direct through the purchaser's materials planning system, the second directly from a negotiated agreement. In addition, in order to minimise administrative costs, small orders may be placed by phone or fax, perhaps with payment of the supplier effected at once either by credit card or purchasing card (see immediately below). A prelude to order placement may be a request for information (RFI) - a form sent to a number of suppliers containing a brief questionnaire. Suppliers returning promising replies may then be sent a request for a quotation form (RFQ form). The RFQ may be straightforward or complex depending on the item under consideration.
Note that a major advantage of credit and purchasing cards is that the buyer can take quick advantage of ad hoc opportunities (eg Internet buying). Also note the difference between credit and purchasing cards:
Credit Cards: the amount charged has got VAT (value added tax) on it, so that a VAT invoice is needed in order to claim back the tax from HMRevenue & Customs.
Purchasing Cards: VAT is dealt with by the supplier and Revenue & Customs - the invoice is not a VAT invoice.
2.1.2 Invitation to Tender
A special form of request, used by the manufacturing company on occasion but very common in government and government-controlled institutions, and having legal significance, is the invitation to tender. Invitations to tender by the buyer, are, in legal terms, invitations to treat (ie invitations to bargain, or negotiate, or 'form a treaty'). That is, the buyer's invitations to tender are not contractual offers. The suppliers' tenders, however, very definitely are contractual offers, so that acceptance of a supplier's tender by the buyer creates a legally enforceable contract, as described below. The buyer is bound to consider all tenders which comply with the conditions laid down and are submitted by the date specified. He is not, however, obliged to accept the lowest bid, or accept any bid at all, unless there is a specific and unequivocal statement in the original invitation that he will indeed accept it ... that is, where the invitation to tender amounts in reality to a contractual offer. The buyer would therefore be wise to phrase his invitation to tender cautiously, very much in the manner of an inquiry. (Note that the term tendering is used in everyday parlance to describe both the seeking of a tender from a supplier and the proffering of a tender by a supplier to a purchaser.) Note that when tenders are received, they should be date stamped and locked away. The opening of tenders is a formal matter and should always be carried out by the purchaser in the presence of a witness.
Competitive Tendering
The purchasing manager may place an ad in a trade journal or similar, inviting all potential suppliers either to submit tenders as specified, or contact the manufacturing company for further details. The advertisement should be phrased with great care. The tender document (the technical and commercial requirements) should be prepared with even more care, since it will form the basis of the contract if it is referred to in the tender submitted by the successful supplier.
Selective Tendering
Here, the invitations to tender are sent only to preferred suppliers.
Negotiated Tendering (Post Tender Negotiation, PTN)
Negotiated tendering refers to follow-up negotiation after tenders have been received in the course of competitive tendering, before the acceptance of the successful bid, and is synonymous with post tender negotiation, PTN. PTN is undertaken perhaps to clarify certain points, including technical points, but most often to seek a reduction in the price. PTN may seem unfair to those not invited, but it is done and is legal.
The law of contract is not a specific law contained in a particular statute passed by Act of Parliament - instead, it is derived by reference to court rulings in past cases, each such ruling itself taking note of past decisions; the particular circumstances of the case to hand; and the principles that people are free to engage in lawful commerce among themselves, and are obliged to keep the promises they have made. Contract law, therefore, involves the study of past cases which have come before the courts and the principles which have been established and applied in deciding their outcome. For a contract to come into existence, three main essential elements must be present:
First, there must be an offer to sell, such as a tender sent by a supplier, or else an offer to buy, such as a purchase order sent by the buyer without prior discussion. An offer made by one party can be accepted or rejected by the other. A counteroffer, or alternative offer, by the other party is, in effect, a rejection of the original offer. An offer can also later be revoked, provided this is done before its acceptance, and it can lapse "after a reasonable time". An offer is to be distinguished from "an invitation to treat", which is an action by one party intended to initiate the bargaining process. ( For example, items in a shop window are not offers, they are invitations to treat, made by the retailer and intended to induce the shopper to enter his premises and make an offer to buy the goods displayed. Thus an RFQ (see above) is usually an invitation to the supplier to make an offer to supply.)
The second element is that the buyer must accept the supplier's offer, and this must be done without further conditions, or, alternatively, that the supplier must accept the buyer's offer. Acceptance might be quite specific, such as by sending a letter of acceptance. In certain circumstances, the conduct of the other party might be deemed to constitute acceptance (for example, the despatching by the supplier of the actual goods, even though he has sent no formal acknowledgment, would be deemed acceptance). Doing nothing and saying nothing cannot be construed as acceptance.
The third element is that there must be 'consideration'. That is, there must be value to the contract - evidence that a bargain, or deal, has been struck. The most obvious indication that this is so is the stated promise to pay money in return for goods bought, but bargains might also take the form of the exchange of goods by bartering, or the payment for goods by the performance of some service.
There are also a number of conditions, set out below, which must be present in the agreement if it is to constitute a legal contract.
(1) Intention to form legal relations. It is assumed in commercial agreements that the two parties intend to be contractually bound. If this is not the purchasing company's intention, because, say, the dialogue with the external company is purely exploratory, or is merely laying the ground for a further meeting, this should be made clear at the time.
(2) The two parties should each have the authority to contract. Note that agreements reached by users stemming from technical negotiations may be held to be enforceable if the staff concerned have given the impression of having authority. Consequently, the purchasing manager must make it clear to the supplier that the commercial and legal sides of the agreement are to be dealt with exclusively by him, separately from the technical discussions. The principal (ie the company) is bound by the agent's actions.
(3) Within the (criminal) law. A legal contract cannot be made which involves, say, fraud or the non-payment of taxes.
(4) Not unfair. A contract is not legal if it devolves on the accidental death of a user of a machine etc.
(5) Privity of contract. That is, if Parties A & B enter into an agreement, only they are privy to it and only they can take action in law. Thus even if Party C is the subject of the agreement, C cannot take action.
Certainty of Terms, Estoppel & Parol Agreements
There must be certainty of terms ... no residual ambiguity. That is, the offer must contain all the detail necessary for the subsequent agreement to be capable of being carried out in its entirety - for example, technical specifications must be set out, along with quantities, price, dates and the rest. Note also the doctrine of estoppel ... ie the contract relates to what is specifically agreed, usually as it is put down in a written document. It can never relate to what one party or the other intended in his mind, and thought it related to, but who failed to write it down or became confused. For example, if the buyer thought that the supplier would deliver the goods, but delivery was not actually agreed, he is "estopped" from pleading that it was assumed the supplier would indeed deliver.
Note that contracts are equally valid whether made orally or in writing. Oral (or parol) agreements, however, are clearly unsuitable for complex or lengthy agreements, or indeed for modern business generally. Offers, acceptances and the rest should therefore be made in writing, on official company forms, and all paperwork kept on file.
2.2.2 Contractual Terms (including representations and misrepresentation)
The contractual terms, or details, of the contract are either express or implied. Before dealing with them, however, a distinction is made between contractual terms and representations. A representation is a statement made about the goods or service by the supplier intended to persuade the buyer to enter into the contract. The representation is distinguished from a contractual term in so far that it is not eventually incorporated in the terms themselves. Misrepresentation can give rise to legal liability and even criminal prosecution, and is divided into three classes:
(i) misrepresentation of fact - the supplier has made an untrue statement about a factual matter;
(ii) material misrepresentation - the fact which has been misrepresented is inherently important, and is not a triviality;
(iii) the misrepresentation induced the contract.
Express contract terms ...
... are those which are put down in the agreement and which give it its unique meaning - that is, they are explicit, unmistakable and not simply implied. Examples are the identity of the materials to be delivered; the date of delivery; the quantity; price; the technical service to be provided; and so forth. (Whether the express contract terms are conditions or not is another matter - see below.)
Implied contract terms ...
... are those which both parties would have agreed to without hesitation, but overlooked or never bothered about. The court reads the implied terms into the contract, even though they were not expressly part of it. For example, '... that the bags in which concrete will be delivered to the buyer's stockyard will be rainproof'. Implied terms also relate to common law and commonsense ... for example, that the supplier's driver will exercise reasonable care when making the delivery and when unloading.
Both express and implied contract terms are either conditions of the contract, or warranties. The importance of these distinctions will be seen in due course, under breach of contract.
A condition of a contract ...
... is a central element of the agreement, such that a failure to fulfil it will seriously detract from the contract's value to the party affected. Usually, the central elements of the agreement will be clearly seen as conditions from the sense and reading of the document, and if it is the intention of the two parties that the performance of some action should be a condition, this should be made clear in the drafting of the text. This is particularly true when timeliness of delivery is concerned. If on-time delivery is vital and is to be regarded as a condition, attention must be drawn to it *.
A warranty ...
... is a term that is not central to the contract, so that the agreement still retains most of its anticipated value, though it is not, in the event, fulfilled to the letter. * Under normal circumstances, the date of delivery of a new machine tool to be installed on the manufacturing company's shop floor would be a warranty, not a condition. If the delivery was two weeks late, this might be annoying, but the detraction from the value of the contract overall would be small, given the machine's expected life, say, of ten years. If the date of delivery is critical, the buyer can make it an express condition simply by saying so. The phrase often used by lawyers to do so is time is of the essence, but it would be quite in order simply to write ".. the date of delivery is a condition of this contract".
Note that although it is not being dealt with directly in this on-line course, a further type of condition is innominate. The word innominate means "having no name", and is used in law when a contractual obligation is either a condition or a warranty depending on the actual effect of an actual failure to fulfil the obligation, rather than on the inherent status of the obligation in the contract. For example, suppose a contract stipulates that the supplier is to deliver 100 items, and in the event he delivers only 80. Two alternative outcomes might result from this: (1) for compelling technical reasons connected with the short delivery, the purchasing company finds it has to abandon its production programme and tear down its set-up ... the delivery term of 100 units in these circumstances now assumes the status of a condition; and (2) the purchasing company is able to proceed with its production programme, although it is forced to make a somewhat smaller batch ... in these circumstances the term now assumes the status of a warranty.
Exclusion Clauses
In agreeing the terms and conditions of a contract, either the buyer or the supplier may seek to insert in it what are known as exclusion clauses. An exclusion clause may take one of two forms: (1) it may attempt to exclude or qualify (ie modify) a contractual obligation, or (2) it may attempt to exclude or qualify a remedy (eg the compensation to be paid on non-fulfilment of a contractual obligation).
Before considering a supplier's exclusion clause, the buyer should satisfy himself that the clause really is part of the contract. For example, if he orders material from a supplier, and on the supplier's delivery note a statement has been added that such-and-such is excluded, this statement is not part of the contract and has no force whatsoever - any exclusion must be stated at the outset when the contract is formed. An exception to this exists if the buyer places repeated, regular orders, and becomes - or should become - well aware of the supplier's exclusion. A second exception exists if both parties are "in the trade" and the exclusion is the custom and practice of business. In deciding whether an exclusion clause is valid, the principal which is applied by the courts is the "main purpose rule". That is, in a written contract, the existence of an express exclusion that excludes one or other of the contractual conditions (but not warranties) appears illogical - if the obligation/condition truly exists, the exclusion must therefore be invalid, and if the exclusion is valid, the obligation/condition does not exist! Consequently, to determine whether an exclusion clause relating to a condition is valid, the context and purpose of the contract as a whole must be taken into account by the court. Generally, exclusions to conditions will not be valid - was the exclusion really meant to exist? Exclusion clauses are also the subject of statute law in the form of the Unfair Contract Terms Act 1977, summarised as follows:
(1) No exclusion or restriction can apply to negligence which results in injury or loss of life;
(2) In excluding or restricting liability, the test of reasonableness must be applied;
(3) Matters cannot be excluded which relate to title in the goods as governed by the Sale of Goods Act 1979 or by the Supply of Goods Act 1973;
(4) A manufacturer or distributor cannot exclude or restrict his liability to the ultimate user of the goods.
Note that an exclusion clause is to be distinguished from one that is legally void. A clause is vitiated (= legally invalidated) if it is held to be in restraint of trade. An example is a contract between Companies A & B not to engage each others staff within a so-many years of their leaving.
2.2.3 The Battle of the Forms
Whose express terms are to prevail in the contract? - The buyer's or the supplier's? If the buyer sends a purchase order to order the goods, the purchase order having his (the buyer's) 'terms and conditions' attached, then if the supplier accepts this without further ado, then the buyer's terms and conditions will constitute the contractual terms. However, if the supplier, on receiving the purchase order, responds by some means, such as email, fax or letter, saying he disagrees with certain aspects of the purchase order (eg the terms of payment) and that he requires alternative conditions, then if things go ahead from that point, the contractual terms are the original purchase order terms modified by the supplier's alternative as stated in his communication. Naturally, this can go on and on. That is, on receiving the supplier's objections by letter (etc), the buyer may repudiate the objections and insist on his original conditions, or even demand completely new conditions. Where there is a dispute such as this, the buyer should keep a writen record of where things are up to* and keep a careful eye on his position. * In particular, note that delivery of the goods by the supplier, or their acceptance by the buyer, implies acceptance of the terms of the contract at that point.
2.2.4 Termination of the Contract including 'Rescission'
The normal termination of a contract occurs, naturally, when both parties fulfil their obligations under it - ie the supplier delivers and the buyer pays. The fulfilment by the supplier must be "substantial". If it is not substantial, payment by the buyer may be on a quantum meruit basis (= Latin for how much is taken). For example, a buyer may pay for only that portion of the work which has been completed, although that may not be acceptable if the contract makes it quite clear that the work must be completed in its entirety. The contract may also terminate when a date stipulated in the express conditions has been reached - say, 19th December, 2009. Alternatively, it may be agreed by both parties that the contract should be brought to an end before the original contractual obligations have been fulfilled. Such an act is known as rescission. In this case, the agreement to terminate is, itself, a separate contract, the consideration being the release of the two parties from having to complete their original obligations (and, doubtless, the settling of any expenses which may have been occurred by one party or another). ASs stated, terminating the contract in this way is termed rescission. Other reasons for termination are:
Frustration: The main point to make is that a contract is not frustrated - ie void and at an end - simply because it has unexpectedly become very difficult or burdensome to perform. The classic case is the closure of the Suez Canal in 1956 affecting suppliers of goods to the UK from the Far East, who were then faced with shipping their goods via the Cape. The journey via the Cape was long and expensive, but importation was nevertheless still possible, so their contracts to supply were not frustrated. Similarly, a contract is not frustrated because the materials or labour involved have suddenly become scarce or expensive. However, if the supplier's factory is destroyed by fire, making manufacture impossible, the contract is frustrated, since the continued existence of the supplier's factory is held to be an implied condition of the contract. Note that according to the Frustrated Contracts Act 1943, the position of all parties should be restored to their original positions before the frustration. That is, all advance payments are to be returned and so forth. However, if money has been spent 'in anticipation of performance' - eg on initial design and the manufacture of prototypes - the court will order reimbursement of the cost, up to a limit.
Force Majeure: Natural and unavoidable catastrophes, commonly known as acts of God (literally irresistible force). If the reasons for termination due to force majeure are to extend to acts of man - for example, labour strikes, war, embargoes, explosions etc, it is advisable to specify these in the contract - eg there have been recent insurance disputes as to whether or not terrorist acts qualify.
Mistake (common, mutual or unilateral): First, let it be said that the old expression caveat emptor is a powerful argument in denying the claim that a mistake has occurred in a contract such that the contract is void. Caveat emptor is Latin for beware the buyer, and means that the buyer should be most careful in what he purchases. If he buys something unwisely, he has only himself to blame. One might also add the expression caveat venditor, beware the seller. Nevertheless, suppose that the buyer knows that the supplier is making a mistake in agreeing to a contract. In this case, the buyer can enforce the contract only provided the mistake concerns matters of fact. Things are different if the mistake concerns the terms of the contract themselves. For example, suppose the buyer knows the supplier is mistaken as to the terms of the contract - ie the buyer knows that the supplier thinks the contract contains term X, whereas in fact the contract actually contains term Y instead. In such a case, the buyer cannot enforce the contract in the sense of term Y, even though the contract which both parties signed states Y, not X. An example of this was a contract stating a building was to be completed in 30 months, which the contractor thought was 18 months. (The contractor had not read the contract properly.) The court ordered the duration in the contract to be changed from 30 months to 18 months, because it (the court) was satisfied in the circumstances that the written words (30) did not represent the true contract between the parties. This was an 18 month contract because the other party knew at the time that the contractors believed it was an 18 month contract. As a final statement, the buyer should know that whenever it is to be inferred from the terms of a contract that the agreement has been reached on the basis of a particular contractual assumption, and that assumption turns out not to be the case, the contract is void from the start.
Breach of Conditions See immediately below.
2.2.5 Remedies (Damages) in case of Breach
Legal remedies for breach of conditions depend on whether the obligation that has not been performed is a condition or a warranty. If there has been a breach of a condition, the innocent party may terminate the contract and sue in the courts for damages, or may continue with the contract. If there has been a breach of warranty, the innocent party may not terminate the contract. He can, however, sue in the courts for damages. Such damages are either unliquidated or liquidated.
Unliquidated damages mean the financial compensation which is to be awarded to the party suffering the breach, to be paid by the party which has failed to carry out its obligations, has not been calculated and expressed in financial terms beforehand, so that it is up to the court to decide the sum to be awarded. The damages are arrived at on consideration of two factors:
The first is the amount of money needed to compensate the innocent party for the direct loss he has sustained as a result of the breach - for example, the cost to put right a roof following faulty construction work.
The second is the indirect loss to the innocent party as a consequence of the breach.
Liquidated damages are payments stated in the contract itself, and which fall due when various conditions and warranties which constitute the objectives of the agreement are not performed. An example is a condition that states that delivery shall be on 2nd November, 2009, and an accompanying liquidated damages clause that further states that the supplier will pay liquidated damages to the buyer of £1000 per day for every day the delivery is late. The sums nominated in liquidated damages clauses must be arrived at by genuine calculation of the losses to the buyer if the various conditions and warranties are not performed by the supplier. No attempt should be made to turn them into penalties intended to punish or put pressure on the other party, and if they clearly are penalties, the supplier which does not achieve the performance required will, in the event, refuse to pay them, and will be supported in his refusal by the courts regardless of the fact that he signed the contract in the first place. In arriving at liquidated damages, the two parties should scrupulously follow the three guidelines issued by the courts:
(1) Any sum stated in a clause must not be more than the maximum loss that could be suffered by the breach;
(2) the sum must not be more than the consideration attaching to the contract itself; and
(3) a single sum of money cannot apply to every condition and warranty not performed (since this would indicate that a serious attempt honestly to calculate the various potential losses had not, in fact, been made).
Note that suppliers may attempt to insert damage limitation clauses into contracts during the course of negotiations, perhaps disguised as liquidated damages. The buyer should be on his guard, however. It would, perhaps, be better that no mention of liquidated damages and damage limitation was made to tie his hands, and that matters, if necessary, were dealt with in court.
2.3.1 The INCOTERMS
This sub-section concerns the division of responsibility in a particular purchase between the company and its supplier for such matters as the carriage of the goods, their insurance and if, international transfer is involved, the payment of dock dues and duty. The buyer and supplier will normally nominate one of the thirteen standard terms drawn up by the International Chamber of Commerce, used worldwide and referred to as the Incoterms. (The International Chamber of Commerce Terms of Sale.). The 13 standard terms define alternative arrangements, or obligations, of the seller, as the party providing the service of actual transportation and delivery of the goods, and the buyer, the party paying for the service and requiring the goods to be transported, in such matters as: arranging for carriage; payment of insurance; the payment of dock dues; the completion and presentation of customs documents; and customs duty.
For the buyer of service, the least onerous Incoterm is "Ex Works"(EXW, followed by a named place from which the goods are to be collected ). With EXW, the goods merely have to be placed by the buyer of the service, with immediate wrapping only, at his despatch dock, and all subsequent activities involved in the move are the responsibility of the company undertaking it. (Note that there is no obligation to load the vehicle.) As one moves through the 13 terms, the obligations of the seller (ie the company undertaking the move) increase and the requirements of the company wishing to effect the move correspondingly decrease. The maximum obligations of the transport company providing the service are "Delivered Duty Paid" (DDP, followed by a named place within the country of destination). The Incoterms were first formulated in 1936 and are revised about every ten years, the last revision effective from 1.1.00 being end 1999. The year of publication should be quoted on any agreement between seller and buyer involving the Incoterms (eg "FOB the SS Mary Rose, Liverpool, Incoterms 2000"). A booklet published by the ICC is available for about £26 setting out the terms in full, and may be ordered on the Internet through Amazon.co.uk. It is essential that any buyer wishing to become seriously involved in using an Incoterm should consult this booklet, and the commentary on the Incoterms written by Jan Ramberg*, also available from Amazon. The complete list of Incoterms is: EXW ("Departure"), FCA, FAS and FOB ("Main carriage unpaid"), CFR, CIF, CPT and CIP ("Main carriage paid"), DAF, DES, DEQ, DDU, and DDP ("Arrival"). The advantage to buyer and seller in choosing to nominate a standard Incoterm to govern the transfer of goods is that all the terms are well known through ICC booklets and guides, and from their frequent use throughout commerce. The principal publication helpfully makes clear, for each one, exactly what activities each party is responsible for. That is, following a 100 word explanation, the remaining text is divided into two clear sections labelled "The Seller (of the transportation service) Must ... (then the action points necessary)" and "The Buyer Must ... (action points)". Naturally, a specific reference must be made in the contract between buyer and supplier as to which Incoterm (including its published source and year of publication) is to govern the agreement. However, in agreeing it, there is no reason at all why the provisions set out in the standard term should not be modified if some special condition is to prevail. The most common amendment is to Ex-Works, requiring the supplier to load the goods. That is, the agreement states "Goods and delivery to be made Ex-Works at Supplier's factory in Sheffield, in accordance with term EXW of Incoterms 2000, Supplier to load vehicle." Problems for the supplier with EXW are that the buyer may delay in making the collection, so affecting the supplier's storage costs and disrupting his everyday work (for example, the buyer's vehicle may arrive without prior warning, at a difficult time, causing disruption and congestion). *Note that there are traps in using the Incoterms - for example, if the buyer agrees to load the vehicle as a courtesy in an EXW collection of the goods, and the goods are damaged or a person injured in doing so, where does the liability lie? Jan Remberg's book deals with matters such as this, and its study strongly advised.
2.3.2 The Delivery of Goods
Delivery itself is merely the voluntary transfer of physical possession from one party to another. Thus the signing of a delivery note presented by the supplier or haulier simply acknowledges physical receipt of the goods. Section 34 of the Sale of Goods Act 1979 specifically lays down that: "Where goods are delivered to the buyer and he has not previously examined them, he is not deemed to have accepted them until he has had a reasonable opportunity of examining them to ensure their compliance with the contract". (The Act also states that the supplier must, on request, give the buyer reasonable time.) The obligations of the party receiving the goods is simply that reasonable care should be taken in their storage.
Remember from above, that on delivery the supplier cannot attempt to impose new conditions in the contract, such as 'non-conformancies must be notified to the supplier within 24 hours', or 'we will not be responsible if ...'. These statements, perhaps accompanying the delivery note, mean nothing. If the supplier wanted to impose these conditions on the delivery, they should have been stated and agreed in the contract from the beginning.
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The word 'acceptance' here means the legal and commercial acceptance of the goods, not the everyday meaning of physical receipt. Thus the legal/commercial acceptance of the goods by the buyer in effect means the buyer's concurrence that the goods delivered comply with the contract's provisions in a number of vital regards - for example: delivery date; general material state, especially as regards design and quality; and quantity. From the legal viewpoint, since such points of compliance are likely to be central contract conditions, the most important effect of accepting the goods is that the buyer can no longer terminate the contract because of breach of condition relating to these matters (although he can still sue under the Sale of Goods Act for breach of warranty). Section 35 of the Act states: "The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them".
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Having title to the goods means being their legal owner (cf the 'title deeds' of a house). Absolute ownership of, or title to, the goods, is transferred to the buyer when the terms of the contract specify that it is to be transferred, having regard also to the conduct of the two parties and the circumstances applying. [Before the 1960s, the INCOTERMS specified the point where title transferred from one party to the other. Nowadays, the INCOTERMS make no statement whatsoever about the transfer of title.] One consequence of ownership arises if one party or the other becomes bankrupt during the exchange of goods and money. For example, if the buyer became bankrupt before he had paid for the goods, and the supplier still retained legal title in them, the supplier can claim for their return from the receiver in bankruptcy. If title had been transferred to the buyer, the goods would be seized by the receiver in bankrupcy, and sold to realise the buyer's assets. It is common practice, and advisable from the supplier's viewpoint, therefore, to retain title to the goods until payment has been made. This can be easily assured by stating in the contract that the title of the supplier is retained by him until payment is received.
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Specific goods and specific future goods are goods identified and agreed at the time the contract comes into existence. Thus a machine tool distinguishable by its serial number is a specific good. A product being made to order is a specific future good.
Unascertained goods are likely to be associated with make-to-stock companies. An example of unascertained goods are angle brackets, to be selected from the company's stockholding of 350 brackets, and being the subject of a customer's order. Unascertained goods are said to become ascertained when they are duly selected to fulfil the order - for example, when, say, 80 brackets for our order are picked, ready for packing and despatch.
Bailments: Goods which are free issue material or have been sent for repair or to have a special operation carried out on them, then to be returned, are referred to as bailments, the party supplying them being the bailor and the party receiving them the bailee. A formal definition of bailments is that they are "goods delivered in trust upon an expressed contract that the trust be faithfully executed on the part of the bailee". That is, the bailee must exercise due care in looking after the materials in his charge.
Goods which have been processed. If goods have been processed, so that the original material has lost its identity, it is held that the material has become the buyer's property regardless of any retention of title clause. However, even though the original goods are lost to the supplier, if the buyer is in possession of other goods relating to a separate, second contract with the same supplier, albeit these being already paid for, title in these other goods can be claimed by the supplier against payment for the first contract. Among other things, this obviates the need for the supplier continually to identify and mark the materials sold to the buyer - for example, when materials are being supplied in a succession of repeat orders.
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3.1.1 The Trail of Commercial Information
The trail of data required before the final close out of a purchase order (see 3.1.2 below) is fundamental to the commercial operation of the company, although once more the use of the computer database has simplified it and made it less liable to error. The documents and six steps are:
I Notification of the Order
The order is raised and sent to the supplier, and an official Order Number is attached to it. The order will often be raised electronically, and the order number assigned by computer.
II Confirmation of Despatch (Advice Note)
The supplier sends the buying company a message saying that the goods are being physically despatched.
III The Delivery Note and Consignment Note
A note giving a broad description of the goods will accompany the physical goods. If the actual delivery is being made by a third party (ie by a transport haulier), a consignment note will be raised by the supplier confirming that he has assigned the goods to the haulier for carriage. This note might be forwarded direct to the buyer, but will usually be in the possession of the haulier, for checking if necessary by the buyer.
IV Detailed Unpacking Note
If the load is a large, complex one, it will need to be carefully unpacked and checked.
V Notification of Damage etc
Goods-in staff or those responsible for unpacking must record damaged material, stock shortages and excesses and other errors. A final notification of delivery giving this information is sent to Purchasing etc. Note that the company has a duty of care with respect to goods which are to be returned for reasons of non-compliance. They must be held in good condition until they are collected.
VI Payment
If the goods are satisfactory, payment is authorised, to be made on the contractual date.
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Most orders are placed through the mechanism of the 'purchase order'. The purchase order is a formal company document which conveys the instructions or detail of the required supply. The legal role of the purchase order in forming the contract of supply will vary with circumstances: most usually, it will be an offer, such that the supplier's acceptance of it at the price mentioned seals the contract, but it might alternatively be the acceptance of an offer (say, an order placed immediately against the supplier's tender.) The document itself may also be used by the company simply to convey detail, perhaps being a call-off for material against a yearly contract already in existence. The purchase order might convey a summary of substantial material to be delivered at various times in the future by special order forms under the P.O.'s 'umbrella'. Finally, a particularly important role of the purchase order is to superimpose onto the contract certain express contractual conditions required by the purchaser, such as conditions of payment and such others as those in Section 2 (see The Battle of the Forms, above). These conditions are typically printed on the reverse of the document itself. In formulating the terms and conditions, the buyer must beware of making them one-sided or onerous. Firstly, if he does, they will be resisted by suppliers and his aim of having a single, standard set of express conditions governing the majority of his contracts will be defeated by requiring to incorporate in numerous contracts individual letters of objection. Secondly, where a supplier deals on the buyer's standard terms, he should beware that under the Unfair Contract Terms Act (see above), the buyer cannot use a standard contract term to exclude or restrict his liability in the event of breach on contract. (By the same token, of course, where the buyer deals on a supplier's standard terms, the supplier cannot incorporate a standard term to exclude his own liability in the event of his own breach.)
In summary, the roles of the purchase order are as follows:
a. To make it clear what is being bought - the specific detail of the contract;
b. To superimpose onto the contract certain express conditions;, usually printed on the reverse of the document;
c. To act as a formal control, so that the purchaser can readily ascertain its supply position and its financial liabilities.
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3.1.3 Progressing and Expediting
Progressing means checking and communicating with suppliers at critical milestones in the order's life - fabrication, assembly, testing and despatch, perhaps. Progressing will normally be confined to major purchases such as capital acquisition and purchases involving novel, potentially uncertain technology. When it takes place it will amount to no more than communication and recording of events by purchasing as part of a joint supplier/purchasing team. Expediting by contrast has another connotation - the chasing up of orders which are late, the chivvying of suppliers to perform to their delivery promises and the mitigation of damage to the company by orders which are becoming increasingly behind. As such, expediting is a dirty word in the modern purchasing vocabulary. One of the purposes of better supplier relationships is to impress on suppliers the need for timely deliveries - the requirement for material to fit into its time slot as part of the company's master schedule. Note in expediting that the buyer is just as entitled to use the planning system to solve his problems as is the production manager - ie is the stock really needed? An example of what is meant is as follows, in which raw material B is used in the manufacture of product A:
the original need for raw material B is 20 units, based on a minimum order quantity of 20 units to add to existing stock of B of 6 units. The total need for B is 15 units, required in production. However, by modifying the planned production of A, the net need for B is modified to only 8 units. The supplier is persuaded to send 2 units only, which, with the existing stock of B (2 units), is sufficient to allow the revised production plan to go ahead without the need for a minimum order.
Expediting should be seen as a small part of the purchasing task, not a major departmental activity. Constant expediting will lead to extensive raw material stocks as buyers build stocks at the company's expense to protect it from the uncertainty created by its inadequate supplier base.
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3.2 The Order Quantity to Minimise Cost
Planning systems tell us when orders should be placed with suppliers, but it is up to the purchasing function alone to determine how much material is then to be ordered ... ie the planning function or individual buyers must specify what the replenishment quantities for the various materials are to be, these quantities then being entered into the planning and purchasing system. The replenishment quantity of a product (traditionally denominated as 'R') is clearly vital in inventory control, since the average stock of raw material held is (R / 2 + S), where S is the safety stock. The order quantity R is also important in operating efficiency, since it determines the number of orders to be handled each year and influences the flexibility of response to external demand. Desirably, the ideal amount to order, R, is that quantity which minimises the total cost of ordering, stockholding etc.. The ideal quantity is generally referred to as the economic order quantity, or EOQ. What the word 'economic' means is simply 'least cost'. Calculations of order quantities are relevant to the buyer in a number of circumstances ... for example, in ordering basic replenishments from suppliers as specified in the planning system, in deciciding whether or not to accept a bulk discount offered by a supplier, in delivering material to customers against blanket orders, in consignment stocks and perhaps in distributing consolidated loads. The two sets of costs are involved in arriving at a product's EOQ are ...
(i) Ordering Costs
The costs of transferring stock from the source to the point of delivery, including physical transfer, despatching and purchasing administration, handling and accounting. The more orders that are placed per year and the more deliveries that are made, the higher the unit order cost. Unit order cost is the total of all the ordering costs divided by the total quantity ordered.
(ii) Stock Holding Costs
A great deal of attention has been focussed on stockholding in recent years. Costs include the notional interest on the money invested in the stock itself, valued at a rate of interest equal to the company's target return on investment, the cost of storage space occupied by the material, the cost of the warehousing operations needed to manage the stock, the cost of insurance etc...
Derivation of the least cost quantity is given in every book on materials management. If the quantity which minimises the total cost is "q", it is given by the following equation:
q = SQRT{{2 x A x O} /( i xV),
where q =economic order quantity (ie the EOQ), A = annual usage in units, O = order cost per delivery, i = rate of interest, and V = unit value of the material. If a graphical representation of the trade-off of costs were to be drawn, it would be found that the point on the curve which represents the minimum cost (ie the EOQ) is very shallow, such that there are numerous other points on the curve close by this point which are also very low cost. What the curve indicates is that any quantity that is close to the precise EOQ point will nevertheless result in an order quantity not very far from the ideal value. In other words, in calculating the EOQ using the