Contracting Purchaser - Supplier
Contracting Purchaser - Supplier
Contracting Purchaser - Supplier
IN INDUSTRIAL SUBCONTRACTING
EUROPEAN COMMISSION
Directorate-General XXIII: Enterprise Policy, Distributive Trades, Tourism and Cooperatives
IN INDUSTRIAL SUBCONTRACTING
TABLE OF CONTENTS
PREAMBLE
3. QUALITY
IN INDUSTRIAL SUBCONTRACTING1
PREAMBLE
In an effort to hold their own in the face of ever intensifying international competition,
representatives of purchasers and suppliers within UNICE have formulated these guidelines
for partnership in industrial Subcontracting. These guidelines are intended to establish the
basic principles and set a recommended framework for partnership between the parties
throughout the whole supply chain. The essence of partnering is cooperation between a
supplier and a purchaser for their mutual benefit. The most successful partnering
arrangements are those built on the competitive strengths of the partners and characterised by
factors such as top level commitment, good communications, cultural fit, trust, flexibility and
team working.
Contracts must ensure a fair balance of interests. However, these guidelines do not interfere
with contractual freedom between suppliers and purchasers, who may continue to choose the
most appropriate legal structures and contractual clauses to organize their commercial
relationship. Rather they are meant to serve as a reference for parties negotiating a
Subcontracting agreement. They may also serve as a basis for specific sectoral agreements2
and for legal texts such as model contracts and general conditions.
1 The term "industrial Subcontracting" refers to all operations where a purchaser buys from a supplier
products or services which are specified by the purchaser and form part of the purchaser's products.
2 Such agreements may reflect the particular needs of certain sectors especially of the building industry where
the term Subcontracting refers to the execution of part of the works by another contractor on a common
construction site in contractual relationship with a main contractor.
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1.1. During the concept and development phase of new products and processes, interested
purchasers should cooperate with suppliers in exchanging ideas and information. Both
parties must respect the confidentiality of such information.
1.2. The early involvement of suppliers in the development phase should be encouraged.
1.3. Services to be provided during the development phase of a product or process should be
defined jointly by the partners, specifying the areas of responsibility and agreeing as to
the payment for these services.
1.4. In the event that a purchaser organises a selection phase in which several potential
suppliers compete against each other, he should communicate his decision on which
supplier has been chosen as rapidly as possible so as to avoid unnecessary expense for
himself and for the suppliers not selected.
1.5. In appropriate areas, joint design should take place, and where needed be accompanied
by guidance from the purchasers.
1.6. As soon as possible during the development phase, the partners should discuss warranty
conditions as well as liability.
2.1.1. General
It is important to specify which elements and services the price covers, for
instance: tools, inspections, buffer stocks, packaging, transport, taxes, warranties,
insurance, etc.
The parties should mutually agree on the appropriate price adjustments stemming
from changes in specifications or additional requirements (e.g. logistics, warranty)
insofar as they influence costs.
The price must also be related to a definite quantity. If the purchaser takes
considerably more or less than the agreed quantity, the parties should mutually
agree to adapt the unit price adequately.
The same applies if the purchaser deviates considerably from the agreed frequency
of call-off3 and therefore causes unduly large fluctuations (overloads or idle
periods) in the supplier's production process.
If the contract is terminated prematurely, the party which had reason to rely on the
contract's continuation must be indemnified for its input.
There are two different methods of establishing the price in a supply contract. If
the product is defined from the start, the price may be decided by bargaining.
Where the parties co-operate in the development of the product, they may also co-
operate in establishing the price by joint cost control.
Bargaining
A price established by bargaining for a given period may not be altered, except
under an agreed price adjustment or renegotiation clause. A long-term contract
with a fixed price should leave the door open for renegotiation of the price to take
into account major unforeseen cost fluctuations.
If the parties intend to prolong a contract which is due to expire they should start
bona fide negotiations in good time in order to have the supplies beyond the
expiry date covered by an agreement on the price.
3By call-off, the purchaser specifies time and quantity of a partial delivery in a long-term contract.
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The terms of payment which result from commercial bargaining should be fair to both
partners, and should achieve an economic and financial result from which both partners
will benefit in the long term.
The best means of ensuring that this occurs is for both partners to put in place good
credit management techniques. Responsible companies should:
- have a clear, consistent policy that they pay bills in accordance with contract,
- ensure that both the finance and purchasing departments are aware of this policy
and adhere to it,
- ensure that there is a system for dealing quickly with complaints and disputes and
advise suppliers without delay when invoices, or parts of invoices, are contested.
If the agreed payment period exceeds the time reasonably needed by the purchaser to
verify the invoice and arrange due payment, this should be regarded as a credit by the
supplier to the purchaser and be taken into account when the price is fixed.
The terms of payment should contain a clause whereby the supplier is automatically
entitled to interest at an agreed rate if the purchaser fails to pay the correct amount on
time.
3. QUALITY
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3.1. Purchaser and suppliers should strive to adopt a common approach to quality within a
jointly defined framework. A joint commitment to total quality improvement at all
levels should be made by both partners.
3.2. Quality assurance agreements between purchasers and suppliers are looked upon as fair
if:
- they make a clear distinction between specifications of a supply and quality assurance
methods;
- they contain specifications clearly defined by mutual consent without, however, being
ranked as guaranteed product features or warranties; whenever possible the parties
should make use of international standards in order to define quality specifications
clearly;
- they clearly define the mutually agreed methods by which incoming goods are to be
controlled;
- they do not impose unreasonable demands, risks or costs on either party through
provisions contained in them regarding; for instance:
3.3. Quality assurance systems gain international recognition if they comply with the
standards EN 29000 ff / ISO 9000 ff and if their application is certified at reasonable
intervals through audits performed by an accredited certification body (third-party
certification). If these conditions are fulfilled, purchasers' audits (second-party
assessment) should as a rule only be carried out in the form of process and product
audits. Such audits should only assess purchaser-specific processes and products at
reasonable intervals or for some justified reason. Duplication of quality assessment
work should be avoided through mutual recognition of certification performed by
different entities.
4.1. In a partnership in industrial Subcontracting, each party will acquire confidential know-
how from the other. The manufacture and use of products may also involve the use of
patents, registered designs, computer software and trade marks. The parties are further
likely to develop new know-how and acquire new industrial property rights during their
cooperation. It is therefore important that the parties agree on their respective right to
use and their obligation to protect such confidential know-how and industrial property
rights.
4.2. An agreement on know-how and industrial property rights will normally be considered
to represent a fair balance of interests if:
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- the basic principle applies that the party who works to develop know-how also enjoys
the benefits of his work;
- the supplier undertakes to inform the purchaser if, during realisation of the contract, he
intends to make improvements or to apply for a patent or other protection for
innovations acquired from his own know-how;
- it contains specifications, clearly defined by mutual consent, on patents or other
protections for innovations in the supplier's manufacturing technology, resulting
from the know-how of both parties;
- each party receives a licence to use the other party's know-how and other industrial
property rights to the extent necessary for fulfilling the contract; but that no
transfer of proprietary rights to such know-how or industrial property rights shall
take place unless the parties have agreed a reasonable payment for such rights;
- the parties are required to treat the other party's know-how as confidential insofar as it
has not entered the public domain;
- any restrictions on using the acquired know-how in other contractual relations are in
conformity with the applicable rules on competition;
- the party responsible for the design is liable for any infringement of third parties'
industrial property rights that may result from the manufacturing, marketing and
use of the product. The supplier should, however, not be liable if the infringement
is due to the purchaser's instructions or if he has not been informed of the
countries where the products will be sold or used.
5.1. The objective of logistics is to optimise the material flow between suppliers and
assemblers at all stages, as well as within individual companies - i.e. along the entire
value chain of a product - for instance in terms of timing, costs and delivery reliability
so as to meet assemblers' needs.
- a rapid material flow (short storage times) with inventories built up and replenished at
the lowest possible costs,
- high flexibility to adjust to changes in assemblers' needs.
5.2. Alongside pure supply contracts additional agreements between the parties on
communications and other services (logistic services) have recently gained in
importance, e.g. agreements on:
- computer-aided exchange of information and the technical preconditions of this
exchange,
- allocation and co-ordination of distribution services, possibly by bringing in third parties
as suppliers of specialist services,
- pre-treatment or pre-assembly of components or systems,
- installation of systems by the supplier in the assembler's production area.
5.3. Combined supply and logistics contracts require a clear and mutually accepted
identification of the goods and services to be supplied, the time and place of delivery,
and the moment when risk is transferred. Risks resulting from logistics contracts must
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also be taken into consideration. Only a complete statement of the goods and services to
be supplied and payment for these goods and services at market prices make it possible
to define the best logistics solutions.
5.4. Risk and cost minimisation of supplies and logistic services is above all determined by:
- the maximum and minimum quantity of each delivery, the attendant minimum call-off
periods, suppliers' notification periods and delivery intervals,
- the way in which the goods are to be supplied and invoiced (means of transport, place of
delivery, packaging, etc.),
- the period within which the purchaser must take delivery of the goods ordered,
- notification periods in the event of changes in, or discontinuation of products,
- agreement on minimum or maximum stocks to be maintained along the logistics chain,
especially in the case of forwarders' warehouses and stocks on consignment,
- special requirements regarding quality and the implementation of Electronic Data
Interchange (EDI) linked with logistics.
6.1. Purchase, use and maintenance of the specific means for production (tools, moulds,
prototypes, models, profiles, quality control equipment) of the goods to be supplied
should be detailed in full and regulated in the contracts. Purchaser and supplier have to
consider carefully in their contract appropriate clauses with a view to securing a fair
balance of interests. It must be specified whether the purchaser will reimburse the
supplier's expenses for production, purchase and maintenance of the special means of
production through direct payment or by inclusion in the price of the supplies
concerned. The contract should further state the respective obligations of the parties as
regards maintenance, repair, insurance and replacement of the specific means of
production.
6.2. The partners should from the outset agree on the right to use the means of production so
that they fairly reflect the economic effort and input of know-how from both purchaser
and supplier with respect to production, purchase and maintenance of the special means
of production. The right to use the special means of production placed by the
purchasers at the suppliers' disposal should lie with the supplier as long as he uses them
for the exclusive purpose of supplying the purchaser.
6.3. The purchaser's legitimate interests may justify his decision to restrict the supplier's
right to use the means of production (e.g. by stipulating their exclusive use for the
purchaser's order) or to demand that they be handed over. This applies to specific
means of production solely owned by the purchaser especially when delivery is unduly
delayed or the products supplied are defective, or when the supplier goes bankrupt.
6.4. Particular care has to be taken as well to ensure that manufacturing secrets (know-how)
incorporated in the means of production are not used without the prior consent of the
entitled party and that reasonable settlement for the manufacturing secrets concerned is
guaranteed by mutual agreement.
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