Supply Chain Management

bp_managementPurchasing in Technology and Aviation

By James O’Brien

Doing business in today’s competitive global economy requires stronger, more reliable relationships in all business segments, including technology equipment, industrial goods, retail products and services. Whether you are a buyer or supplier, regardless of the industry, you must have an understanding of the inherent challenges in the procurement process.

Five Concerns for the Buyer

1. Game Plan Consensus An effective procurement process begins with the participation of all internal stakeholders from the initiation of a project.  Many procurement problems arise from miscommunication – and especially lack of communication – among the parties charged with defining the need, those who identify the source for the solution and those implementing the procurement.  Poor communication on the front end of procurement can cause large problems. However, with effective communication and thoughtful planning many problems can be avoided.

2. Realistic Expectations. Once a procurement need has been defined, the involved stakeholders need to determine and agree on realistic expectations for development, timeframes and costs.  This can be a particularly difficult issue to manage as the desire to rush to market almost always forces unreasonable decisions in the development cycle, which in turn impacts timeframes and ultimately results in escalating costs.

3. Multiple Sourcing. Betting the project – or worse, the company – on a sole source is tantamount to playing Russian roulette.  While established relationships may give buyers comfort, the failure to have a backup supply option can prove extremely damaging should the trusted source fail.  Supply chain planning should include the establishment of alternative relationships and supply paths to reduce source risk.

4. Defining the Requirements. Failing to properly define the work to be completed or product to be produced is a common issue that leads to disagreements with suppliers.  Detailed specifications will help minimize disagreements with the supplier, disappointments upon delivery, being late to the market, and ultimately disappointing your customers.

5. Intellectual Property (“IP”) and Rights Upon Default.  Identifying and protecting your rights related to IP in procurement can be critical for protecting the buyer and minimizing damage in the event of failure by the supplier.  Buyers should identify all IP involved and ensure the ability to use the IP in the event of failure by the supplier, without the need of additional negotiation.   

Five Concerns for the Supplier

1. Realistic Commitments. Winning a job is a fantastic event in any company, but overcommitting on the terms, whether technical, timeframes, capabilities or price, can lead to very difficult discussions with the customer.  The various stakeholders from the supply side, including sales/marketing, development and production, need to reach consensus on critical terms and stick to the plan so as to avoid the difficulties associated with failing to meet the terms of the deal.

2. Market Expectations. In recent years, the general trend in most markets has been towards buyers shifting risk to their suppliers, witnessed by the way customers approach service level commitments and the remedies associated with the failure to meet those commitments. The supplier team needs to develop terms and approaches to these concerns and proactively be prepared to introduce solutions as the customer may face similar expectations with the end user.

3. Warranty and Post-Warranty. Suppliers are increasingly faced with demands for expanded warranties and warranty periods.  Similarly, post-warranty commitments for availability of product, spares, components and service for extended periods with fixed pricing have become more common.  Suppliers need to factor these types of requests into their proposals to customers.

4. International Issues. As the opportunity of suppliers to furnish goods and services to international customers continues to increase, the application of U.S. export control laws, the potential imposition of international and foreign laws, and the associated complexities with international transactions have become more frequent.  Most suppliers should seek outside guidance to address these issues and avoid exposure to potential risks.

5. Know Your Customer. The excitement of a new relationship or a big order can sometimes override the standard diligence process that suppliers should undertake with their customers and prospects.  Keep up to date on current customers, especially their creditworthiness, which can change quickly.  Information on most businesses is readily available and should be one of the first undertakings by a supplier in considering a new or continuing relationship in order to reduce the risk of surprise. Many issues arise during the negotiations of a supply agreement but you can help reduce risks by addressing these critical steps and preparing for a fair agreement that meets the needs of both the buyer and supplier.

obrienJames O’Brien, a lawyer with Lowndes, Drosdick, Doster, Kantor & Reed, P.A., represents clients in global and domestic purchasing and supply chain agreements in the technology and aviation sectors.

James.Obrien@lowndes-law.com or visit www.lowndes-law.com.

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