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Cost and Price Principles:
Buyers can improve their contracts by analyzing seller prices and cost elements. Understanding the relationship of cost to pricing can help when developing negotiation tactics and drafting more complete (and more cost effective) agreements.
Consider these possibilities:
When negotiating a purchase order or contract, the more we understand about the seller’s proposal the better the negotiated outcome can be. That is, by looking at the various cost elements involved in establishing the seller’s price, we can find opportunities to be creative in negotiating cost savings.
With direct cost elements, it is usually obvious how to improve the bottom line and lower the selling price. Changing the raw material, shipping terms, components, labor mix, schedule, etc. are common ways to improve the pricing structure. However, even when considering indirect costs, there are some negotiating strategies that can improve the negotiating outcome.
In our April program we’ll explore the concept of using cost information to negotiate a better contracts. We’ll talk about the kinds of cost & pricing information that can be useful to Buyers and explore some negotiating strategies based on that information.
This ISM article is a very good update and review of the current situation regarding SOX compliance and how it affects Supply Chain managers. http://www.ism.ws/pubs/ISMMag/ismarticle.cfm?ItemNumber=22213 [sorry the article is in the members only section of the web site]
There article raised several SOX-related issues I think are important:
1- The article points out that record of supply chain activities will need to be kept in order to demonstrate compliance. This comment should lead managers to establishing and implementing a comprehensive record identification and management plan. We should not panic and make the assumption that “all records should be kept forever” or even worse that contract records need only be kept long enough to support an annual SOX audit.
There are valid considerations for determining record retention requirements as well as record disposal processes. Many lawyers involved with the electronic discovery process will tell you that having a good records management process is the first line of defense in an audit or lawsuit. A good place for managers to start gathering information is with the NARA Records Management Guidelines. http://www.archives.gov/records-mgmt/policy/guidance-regulations.html
2- The article focuses on SOX as it applies to public companies and might lead supply chain managers in the government sector to disregard the information. In fact, while provisions of the SOX act may not apply, the general principles of management accountability have been promulgated throughout the government by the GAO, OMB and FASAB. This OMB memo of December 21, 2004 does a good job of summing up the emphasis that was being added in response to SOX to OMB circular A-123. www.whitehouse.gov/omb/circulars/a123/a123_rev.pdf Needless to say, countless regulations and policy changes for government agencies have followed the same path since then.
Read more about why I think Supply Chain managers should care about SOX. Link Here...
The article also raised several points I wanted to understand better. I think these issues could have an impact on negotiating complex and cost-type contracts:
What are off balance sheet transactions?
[Does this company really own the equipment they are leasing us?}
Why would we be concerned about
proposals that include
uncompensated overtime? [Is the estimated labor realistic?]
Exempt vs. nonexempt employees.
[Could a DOL audit stop our contract?]:
What do government auditors think about uncompensated
National Contract management Association (NCMA) article
If we consider that how contractors account, estimate, propose and track costs, directly affect contract pricing and performance, then this is just one of many cost-related issues important to Supply Chain managers.
What Does FOB Mean In This Contract?
A few weeks ago I was asked about the proposed amendment to the UCC and specifically about the change to articles about freight terms.
Here is my answer. It's my opinion…. don’t take it to court.
Last time I looked, the amendment to drop the freight-term articles from the UCC had only been passed by 1 or 2 states. Thus, for most of us, the UCC remains unchanged and still includes the sections like 2-319 which address FOB point.
The impetus for the proposed amendment was pre-empted when the International Convention adopted a code which essentially said that the UN international rules apply in transactions between adopting countries unless they specifically write them out of the contract.
That is, under the international code – unless you specifically say otherwise – the INCOTERMS will apply. This eliminated the push to get the UCC updated – it became a moot point.
Thus: in a contract to purchase products from Canada, the definition of FOB point is NOT the UCC definition we are used to - but instead is the definition as described in the INCOTERMS.
Take a look at my conference notes on the subject here:
and in this report here:
Read more about the UNCISG in this ISM magazine article (United Nation Convention for International Sale of Goods) http://www.ism.ws/pubs/ISMMag/ismarticle.cfm?ItemNumber=12499 [sorry members only section of the ISM site]
Bottom line – since US is signatory to the international law – INCOTERMS apply to your contracts outside the US with any other signatory country unless you and the contractor have specifically agree otherwise in the contract. Thus - if you have to ask the question - your contract probably is not structured to prevent the INCOTERMS from applying..
Termination & Breach Battles
We have had several discussions about terminations lately. Here are a couple of items to keep in mind when you are getting ready to terminate or cancel a contract:
Read more in this article.
Put a lock on it.
Words of wisdom I received from a lawyer:
This isn’t bridge, saving a trump card until the last play could backfire. Starting with a weak answer invites rebuttal and argument. Starting with an overwhelming answer may preclude additional discussion. At the very least, starting with only a partial or incomplete answer will require having to answer the same question a second time to provide additional data neglected the first time.
If we are going to lose, (if the argument or the evidence is not good enough to win) we want to know that before we get to court and not be surprised. If I am going to lose the argument, I want to negotiate a settlement before I end up in court.
In the last newsletter we talked about avoiding legal problems with emails. February Newsletter Here are some more reasons why everyone in our business should understand the ramifications and risks associated with email messages (and electronic documents in general
Here is one case where emails were allowed to be
erased – and the court ruled against them.
Here is a lawyer blog about providing documents.
Interesting discussion about multiple attachments and linked documents which may
or may not be found to b relevant by the court.
This is a great example: Former Auditors filed
a Fair Labor case against the parent audit company (KPMG). Judge ruled that KPMG
had to preserve 2500 hard drives as evidence in the case until the drives could
be search and determined to be free of incriminating evidence….[It’s nice to
see some of our favorite people occupied with something other than auditing us.]
That reminds me. Are you prepared for an investigator to walk in to the office and remove all of your computers? What record backups are you keeping and where are they?
Professionals develop their own professional development programs! No one would want to use a doctor or a tax attorney who hasn't kept up with the latest advancements. If you doctor said " I don't keep up with current medicines because my manager won't pay for it," would you stop using that doctor? Is our profession any different? Are we prima donnas who only learn what our managers require and pay for? Are we willing to let someone else will take responsibility for our professional development. Read more.... Here is sample strategy .
Do You Know Where Your Supply Chain Leads?
I'm just asking... Interesting news today; Apple Computer apparently decided to ask that same question. They traced their supply chain and ended up demanding some changes. Here are two related articles that might cause some people to lose some sleep.
London 2012 organizers to 'get tough' on supply chain
Producers of merchandise for the London 2012 Olympic games are set to
introduce new measures to protect workers after an investigation found evidence
of exploitation in Chinese factories. The investigation found evidence of child
labor, excessive hours, poverty pay, dangerous working conditions and no trade
unions at factories producing badges and the Games' mascots Wenlock and
US busts 29 for $325 million in Chinese knockoffs
U.S. authorities charged 29 people with smuggling $325 million in
counterfeit consumer goods from China, including phony Nike sneakers and Coach
handbags, through a New Jersey port. The bust was one of the largest
counterfeiting probes in U.S. history, and it involved smuggling cigarettes,
handbags and sneakers through the Port Newark-Elizabeth Marine Terminal as U.S.
agents secretly watched and listened, U.S. Attorney Paul Fishman said. Agents
infiltrated two overlapping criminal rings and lured them to use a front company
run by the government.
So what do you think a Contracting Officer's due diligence responsibilities entail, and where do they stop?
Seven Steps to Performance Based Acquisition
Guide posted on the government acquisition web portal. Describes the major steps in developing and using performance based criteria in government acquisition. Includes information and description of each step as well as links to more information and other available training opportunities. Some of these principles could be helpful in writing a contract in a way that incentivizes the contractor to perform. What a great idea!
PDF Executive summary:
What’s in it for me? Here is an example:
META DATA - need to know.
A recent article in Internet Law News discussed the legal implications of inadvertently transmitting document metadata in a legal case or during legal discovery. It’s a good article and worth reading. What is metadata? Think of it like the cover of a book. Metadata is not the story, it’s the information on the outside about the document inside. Information, which in some cases, could be something you’d rather not share in court [like the stamp on the inside cover that says Property of Marina High School Library].
Everyone processing contract documents should understand metadata, how it gets attached to documents and how to control it. I’ll add a few suggestions to my next newsletter. I also have several older articles in previous newsletters on the site about hidden data, legal discovery and metadata in documents. Here is a presentation where we discussed meta data
My Resume... Note to Self:
Try reading a few professional newsletters as a distraction and not thinking about it as work. think about describing why they are interesting to your relatives at Thanksgiving. At least the thought will add some humor to the reading. Alternatively, change hats and read professional articles as though you were going to set company policy. Think about how each article might cause an impact to procedures or processes. Then in a job interview, the new insight could prove to be the differentiator between you and the competition.
ISM Web Site - Rosetta stone
The ISM web site is full of information and resources for supply chain managers. Unfortunately, many people find it hard to locate information on the ISM web site ( trust me - it's not because ISM hasn't tried to keep it organized - it's hard to find specific items, because here is so much there. A great affiliate program is a live tour of the web site showing people how to find helpful professional and career information. Here is an updated handout with 4 pages of links to help you in your search.
Mining the ISM Web Site for information - hyperlinks and navigation to just some ISM resources. link here
Invitation to Join
Are you already a member? If not, you are invited to join our local affiliate. Invitation to Join
If you are outside our area, there are over 160 other affiliates in the U.S. and several foreign countries. Check out this list of affiliate web sites: http://www.ism.ws/about/AffiliateWebsitesList.cfm?navItemNumber=5454
Try this web site for Microsoft help,
How much profit is reasonable for this contract? The Fed uses various forms to estimate a reasonable profit. You can find them on the web if you know the trick. The Fed. calls this process weighted guidelines" Here is one, DOE Guide for determining appropriate contractor fee www.energy.gov/sites/prod/files/15.4-2_Weighted_Guidelines_0.pdf
CCR, ORCA, EPLS moving soon!
Note: Even thought this information primarily affects people who place contracts with government funding - I think all buyers should be familiar with CCR. It's a central database of contractors used by government agencies and government contractors. It's a handy place to check the legal name and detailed information about potential suppliers.
SAM= GSA initiative to combine multiple
acquisition-related systems into one portal. To wit:
Initial phase in the implementation process. Acceptance
testing due to start in the next few months ETA this year. 2-page overview:
Benefits, one-stop shopping for CCR, ORCA, EPLS
Also new electronic interface intended to facilitate
data transfer to local systems.
Where have all the pennies gone?
A really fun place for taxpayers: http://www.usaspending.gov/
Career web site run by non profits
One of my favorite newsletters. Well worth sharing for the environment!
Contract Type Comparison
I was asked to provide a reference for determining contract types.
The type of contract used directly affects the cost risks and performance incentives for both the buyer and seller. As a result, determining the correct contract type is one of the most important tasks that a buyer performs during the acquisition process. It’s a teamwork process with the Buyer in the lead, coordinating with the Technical Representative, based on the work required and completeness of the Scope of Work with analysis of the cost risks, cognizance of the Federal regulations about contract types and contract financing.
The rationale for the contract type and associated controls placed in the contract is a material part of the contract award process and file summary. It’s an auditable issue, particularly if the auditor thinks that we might have overspent the contract because we selected the wrong contract type.
Here are some training materials discussing contract types and the issues to consider when selecting a contract type:
Do you know what a Klien bottle is (hint: think mobius strip)
Thought you’d like to see the web site – one of the funniest I’ve seen in a
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