Procurement Agreements used by Industrial OEMs
Procuring industrial components under a formal purchasing contract historically has not been very common in the United States, but with the supply chain rumblings of the last several years, more and more volume part buyers are exploring contract-like engagements to secure the products they need.
Purchasing ‘agreements’ are much more common domestically (and may be referred to as ‘contracts’ informally), with the key difference being that contracts often include penalty language which applies more pressure onto both buying and selling parties than with agreements. Both tools outline conditions governing a business transaction, with a seller offering a particular price and delivery schedule, and a buyer offering to purchase a certain volume of these products on particular payment terms.
Ideally, both the buyer's and seller's interests will intersect right in the middle, helping both parties achieve a healthy procurement arrangement out into the future.
Industrial original equipment manufacturers (or OEMs) find particular value in sourcing critical instrumentation through these types of advanced procurement strategies. Taking a recent agreement we adopted with a major HVAC system manufacturer as an example, one of the most beneficial features of a purchasing agreement is to strengthen a business relationship upon which both parties rely.
For our customer, the agreement provided a strong sense of confidence that their new equipment lineup would have reliable instrumentation supply for years to come at an expectant price point, while also securing standing service and support resources for the life of the agreement.
Features of a Purchasing Agreement in the HVAC Sensor Market
Carrying on with the example we introduced above, a national HVAC equipment manufacturer recently inquired with us looking to secure pressure and temperature instrumentation for a new line of air handling units. Because this was a new product launch, our customer was concerned about selecting an instrumentation supplier and sensor platform that might not prove dependable in terms of price, performance, and availability into the future.
Further, the HVAC OEM did not want to face any type of in-field warranty replacements or defect issues whatsoever. As we discussed the customer's needs in detail, we both felt that writing up an official agreement would help provide the reassurances needed for this type of high-volume, long-term engagement. We included a number of key features in our agreement, including:
- Technical Engineering Support - HVAC systems tend to be highly technical, dealing with widely varying thermal, mechanical, hydraulic, and fluid conditions that are exacerbated by aggressive weather. Sensors used in these systems can suffer from vibration, temperature, and cycle shocks that lead to drift and even failure. Technical support for initial application review, bench and field testing, startup support, and complete documentation are vital details to cover in purchasing agreements.
- Warranty Statements - with the abusive and sometimes extreme operating environments that HVAC systems encounter, OEMs deserve to know that the sensors they procure are backed by robust warranties. Even though our products come with their own individual warranties, we compiled and bolstered our warranty statements directly in the agreement as a testament to our commitment.
- Quality Control – we understood the trust this HVAC OEM was placing in us to supply their new product line’s instrumentation, and though unusual for most purchasing agreements, we included a written QC procedure and promised defect rate (spoiler alert: it was zero) right in the agreement. Because these HVAC units are sent to third-party installers across the country, this QC process (coupled with the OEM’s factory system testing) virtually eliminated all claims by field installers of automation issues upon startup.
Tips for Instrumentation Buying Agreements
How can you maximize the value of your purchasing agreements in instrumentation and similar product arenas? Here are a few tips:
Set a Reasonable Duration
Buyers should seek a duration that covers critical milestones, but not so long that either party may miss opportunities to advance the relationship. For example, a three-year agreement works very well for ensuring that mission-critical instruments are kept in stock, but is short enough that sellers will not bulk order too far in advance and be stuck with multi-year long idle inventory of outdated products.
Include Options to Revise and Renew
Going hand in hand with the above point, include straight-forward language that allows the agreement to be revised or renewed, for both party's benefit. Buyers may wish to switch to newer technologies as they become available, and sellers may obtain increased volume discounts (or just normal market price corrections) that can be passed forward.
Incentivize Superior Performance on Both Sides
Including language into an agreement that incentivizes increasing performance never hurts anyone, and at worst, goes unused without harm. For example, a payment structure that provides a reasonable cash discount for early payment can coerce timely cashflows, and likewise, an early shipment bonus can motivate product being stocked at the manufacturer.
Understand your True Priorities
While procurement agents on both sides often find themselves in a pricing tug-of-war, very rarely is price the fundamental priority of the transaction. Take the time to identify your true priorities and write those into the agreement. Challenge yourself with questions like: do you really need all of those penalty clauses when most of them cause you no actual harm, or do you absolutely need to restrict substitutions at the cost of making your customers wait longer for parts?
Be Clear on the Objective
The ultimate goal of a purchasing agreement should be positive, mutually beneficial, and conservative in nature. At the end of the day, both parties are seeking stable, predictable transactions with trusted partners who share a vested interest in each other's success. With the dollar figures and liability involved with industrial procurement, purchasing agreements serve to align parties and their expectations, but can never replace honest engagement and good faith. When used properly, procurement agreements will amplify a relationship, granting peace of mind so that both parties win.
As a veteran-owned small business, Whitman Controls is dedicated to supplying premium quality, reliable, technologically advanced instrumentation for use in nearly any application. Our Bristol, CT manufacturing facility embodies over 40 years of engineering, fabrication, and customer service expertise, serving both end-user and manufacturing customers nationwide through direct and distribution channels. Our values drive us to provide the highest level of servant partnership that you can find. To discuss your applications or to learn more about our capabilities, please contact us at (800) 233-4401, via email at [email protected], or online at www.whitmancontrols.com.