Question

You are a mid-level procurement manager for your company. (You may choose one from the list below.). Your department VP has called you in and given you a special assignment. The company is thinking of outsourcing the entire production of a group of non-core and lower-tier products. (It intends to maintain production of its “flagship” or core products and the most profitable parts of its product lines or product groups.) It is considering making this move, because the company has seen profits fall in these groups of products, the technology is older and more mature, and the products are no longer central to the company’s success. Nonetheless, there is no intention of divesting this part of the business.

Your VP wants you to develop a term sheet of key contractual conditions that you believe that the company will want to include in the supply contracts for companies that will do the future sourcing. (After the term sheet is completed, the company’s lawyers will put together contract templates for these suppliers. Right now, the legal department just needs to know what the 3-5 key issues are that will need special attention in the resulting contract.

For the sake of variety, you will have three companies to choose from. You should select just one for your response to this LA.

•Fitness device manufacturer: Sales volume is approximately 100,000-150,000 delivered units per month in retail stores and another 15,000/month via on-line sales. Your company produces three tiers of product and is interested in outsourcing the lowest tier that represents about 25% of the company’s sales.

•Outdoor grills and barbeques manufacturer: Sales volume is approximately 20,000 per month with surges several times a year (end of season and start of season). Sales are mostly in home improvement stores, specialty stores, outdoor-sports stores, etc. A small number are on-line. The company is interested in outsourcing the manufacture of all grills and accessories at the three lowest tiers, representing about 40% of total sales.

•Ice cream manufacturer. Your company makes a premium brand and several lower tier brands, which your company now wants to outsource. Because of issues related to spoilage and waste, production is regionally based in six regions of the US. Your company will need to be very concerned with product quality and consistency among the various outsourced companies. The formulas for these products must be kept in confidence.

Answer 1

Terms and conditions for outsourcing of ice cream manufacturing

1) Time: The contract is effective for a period of 3 years, which is further extendable for one year based on satisfactory performance and mutual consent.

2) Storage temperature: The Manufacturer will store ice cream at a required temperature of –25 degree centigrade with a deviation of +/-2 degree centigrade before delivery to the company

3) Non supply of product: Total cost of the quantity of ice cream indented by the company shall be recovered from the manufacturer in case of loss of business to company due to non-supply of the product and/or supply of sub-standard product by the manufacturer, rejected by the company

4) Cost for packaging: Company shall pay to the manufacturer the price inclusive of cost of raw material, packaging, manufacturing, deep-freezing and all incidental charges for price according to the market rates. The prices shall be inclusive of duties and taxes, applicable

5) Storage during transportation: The manufacturer shall deliver the ice cream for the company in refrigerated containers in a hygienic condition at temperature below -15 degree at company depots or at any other place so specified by the company in US

6) Quality and Shelf life: Shelf life of all ice cream will be minimum three months and quality must strictly be according to the standards mentioned in the Quality Management System. The manufacturer shall ensure the quality and consistency of ice cream as per the specifications of the company in all the batches of ice cream

7) Invoicing: Manufacturer shall supply ice cream as required by the company against the invoice containing all details regarding quantity and quality of the said product. A certificate confirming that ice cream meeting all the statutory requirements shall accompany for each batch of the consignment supplied to company

8) Adulteration: The manufacturer undertakes full responsibility of for compliance of the provisions of the Prevention of Food Adulteration Act,1954 and Standard of Weights and Measures Act, 1976

9) Indentation: The company shall send indents at least 3 days in advance for the schedule of supply of ice cream, required from the manufacturer

10) Raw material procurement: The manufacturer shall have to procure raw material and packing materials for manufacturing and packing of icecream of a specified standard and store the same in proper hygienic and required condition

11) Non disclosure: The manufacturer has to sign a Non Disclosure agreement for maintaining the confidentiality of the formulas of ice cream. In case of any leak, the manufacturer has to bear the estimated losses as decided by the company