Longer term Contracting

Contract is the legally binding agreement between two parties

Longer-term contracting is the contract that is longer than a year and the meets following
conditions:
1. Offer and acceptance
An offer is the expression of specific terms in the contract in order for the party to follow and
establish a valid acceptance of offer
An acceptance can be expressed by agreeing all the terms in the offer which are made by
offerors
2. Considerations
Consideration is rather a form of “mutual obligation”-with each party bound to perform at
certain levels and agreeing to carry out his or her responsibility. Consideration is something of
value in the formation of the contract that gives it legal validity.
- Must move from the promise
3. Legal purpose
4. Legal capacity

Why Longer-term Contract?

- Supplier is more willing to commit and invest in resources
- A better volume commitment by buyer
- Avoid frequent supplier switching and adversarial relationship which are counter-
productive
- Provide better opportunity for improvement
- Better protection of intellectual property
- Covers more than just price issue

Benefits of LT Contract
- LTAs helped to standardize products, ensuring that required quality/technical standards
were met across the organization
- A fixed price guaranteed over a certain period was advantageous in volatile markets. It
allowed organizations to plan better and to predict costs.
- LTAs provided volume leverage. Demand for goods and services for which there was
significant and recurrent demand over a relatively longer period of time could be
estimated and consolidated to obtain large volume discounts.

Challenges of LT Contract
- Dependency on one single supplier could result in missed opportunities elsewhere in the
market and increased counter-party risk => lose out new innovative ideas in the market
- Inability to predict future accurately (price, technology, supplier itself)
- Complacency by supplier
When to use LT Contract?
- Suitable for leverage items (high value, many suppliers)
- When supplier may be required to invest in additional resources
- Supplier is capable of making potential improvement
- Supplier relationship is important

Contract management: is the process of ensuring that the parties to a legally agreed to contract
fulfill the requirements, expectations and terms and conditions of agreement
- Negotiate favorable contractual terms to protect against price fluctuation and other
foreseeable situations
- Make contract as “complete” as possible
- Involve internal customers during contracting process
- Select “right” supplier
- Obtain periodic performance feedback
- Ensure total compliance by both parties
- Conduct review meetings involving suppliers and internal customers
- Utilize effective contract management system