Long-term Supply Contracts with MNCs
Setting
When the Atlas Magnetics Group in 2004 decided to open up a completely new market: ‘complex bespoke technical magnets sourced from China’, we, a small start-up company immediately entered a different league, the league of automotive and semiconductor multinationals like Bosch, Brose, ASML, Emerson (Leroy-Somer), etc..
Challenge
At the same time we simply could not afford the risks and/or financial implications normally associated with dealings with these behemoths:
- 60/90 days payment terms
- Consignment stocks / Just-in-Time Delivery
- Safety stocks for account of the supplier
- Orders placed one week in advance, no further liability
- Product liability incl. Recall and other Consequential Damages
- Fixed prices denominated in local currency
These already onerous standard terms were even exacerbated by the complexities introduced by the China option:
- General requirement: payment upfront
- Standard Product Specification did not meet our Requirements – Larger Quality Risk
- Shipping lead-time alone: 5-6 weeks
- Prices float with raw material pricing and exchange rate (in 2004 neither could be hedged – raw materials still cannot)
Solution
Obviously we also had an advantage: lower prices and a better technical customer focus. This however did not prevent my interlocutors from playing hardball: I was told regularly that I could take it or leave, it was entirely up to me. Under these pressures I managed to negotiate very favourable conditions, one of which, flexible pricing, even became the industry standard:
- Payment terms: maximum 60 days, sometimes as low as 15 days
- Safety Stocks financed by client or guaranteed consumption
- Orders placed 16 weeks in advance – consumption guaranteed
- Quarterly price mechanism based on fluctuations in raw material pricing and X-rates
- Product liability (incl. Recall and Consequential Damages) explicitly limited to our insurance pay-out
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