Contract Terminology 101
Contract Terminology 101
The 1st of an eight part series, “The View From the Other Side.”
Essentially marketing material about how great the distributor is, all of their capabilities etc. It’s worth reading because it’s a good place to hide things.
Terms and Conditions
It is important to remember that neither a contract nor an agreement will modify the company’s standard terms and conditions unless this is specifically negotiated. The point here is to make sure and read the very boring terms and conditions document before signing!
All legal documents spell out which state laws apply in the case of a dispute. Disputes don’t happen very often. However, the more dollars are on the line, the more important it becomes to get the distributor to agree to having the jurisdiction be in your state. This is negotiable.
Big distributors all pay their vendors in 60 days. Big distributors all want you to pay as quickly as possible but no later than 30 days. This is referred to as Net 30. Many companies seek quick payment terms like 2% 10, Net 30. In my opinion, this never works in practice. Is the 10 when the check is cut or when it is received? You see my point. If you want to spend time arguing with the distributor, negotiate this into your agreement. Unless you spend millions of dollars on lab supplies, this is non-negotiable. Net 30 is standard.
If a suit arises, how will the dispute be resolved? What is you financial exposure? These are all important questions! Distributors will insert language to minimize their risk.
For more information on contract basics, click here.
F.O.B. Destination or F.O.B. Shipping point?
The term FOB comes from the maritime shipping world and describes who was liable for damage to goods while in transit by sea: the buyer. When ownership of a shipment transferred from seller to buyer as the goods crossed the ship’s rail, the goods were referred to as “free on board.” If the ship sank, the buyer would be on the hook for an FOB shipment because the buyer had already taken ownership.
FOB Destination means that the buyer takes delivery of goods being shipped to them by a supplier once the goods arrive at the buyer's receiving dock. The seller pays and bears the freight charges and owns the goods while they are in transit.
Distributors pay enormous amounts in shipping fees. They also ship enormous quantities of goods and get enormous discounts. They are also well aware that “free shipping” is a huge bargaining chip. Getting truly free freight, meaning all your items, all the time without any add-on charges of any kind is extremely difficult. This is truly a part of the contract/agreement where you have to read and understand the fine print!
Renewals and Extensions
These spell out the term of the agreement and the process for renewal or extension.
Pricing and Discounts
This is the shiny object most people are focused on rather than the stuff we’ve discussed previously. This is why the next six blog posts will be focusing in this area. I will simply list these with a brief definition here.
Items pricing is set by:
Individual SKU - This is not just the catalog number but a combination of both the catalog number and the unit of measure. 1 PK of P/N 12345 is one SKU. 1 CS of P/N 12345 is a second.
Hot List - This is a collection of SKU’s on which you spend most of your money. The number of items on the hot list is typically limited to a number <100.
Vendor - A uniform discount that is applied whenever an item is purchased from the specified vendor.
Category - A much broader collection of items that are categorized. These categories are often created with items where the distributor gets a discount within a specified range from the group of vendor items in that category.
Commodity - Discounts that apply broadly such as “Reusable Glassware.”
Cost Plus - The price is calculated by taking the ‘cost’ of an item and adding a set percentage markup. In nearly all cases, the buyer is not allowed to see the cost nor have a set definition for how it is determined.
GGM Rule - GGM = Guaranteed gross margin. This is a safety valve built in to many agreements. If the gross margin of an item being priced by methods 1 - 6 fall below this minimum, the price is raised to this minimum automatically. (Most customers I know have no clue as to what this is or that it’s even in their contract!)
This should not be confused with Manufacturer's Suggested Retail Price (MSRP). In the laboratory distribution business, distributors insist on establishing the list (retail) price of most items. There is no consistency from vendor to vendor or with the manufacturer if they do advertise the price. As an example, here is the advertised list price of Parafilm 4” X 250’, P/N PM999:
Vendor “A” - $138.56
Vendor “F” - $138.30
Vendor “T” - $70.40
Vendor “Z” - $41.00
You will note that the manufacturer, Bemis Company does not state the price for this item on their web site.
In this industry, discounts may appear large but they are applied to exaggerated list prices.
What we will discuss in this series:
- 1.) Contract Terminology 101 - what are the components and what do they mean to you?
- 2.) Contact vs. Agreement - What’s the difference? Do you have the right to shop elsewhere? What about a “generic” or group contract?
- 3.) The Hot List and Price Caps - The pros and cons.
- 4.) Guaranteed Cost Savings - Hard vs. soft cost savings. Metrics. Penalty clauses.
- 5.) Cost Plus Pricing - Depends a lot on how you define “cost.”
- 6.) Rebates and Prebates - Sound too good to be true? Most likely it is.
- 7.) Profitization - How it’s done and how you can protect against it.
- 8.) LPS On Your Side - The LPS approach. How it addresses these issues and is a better fit for many lab