As an engineer for a major auto supplier in the same industry as AirBoss (rubber products) I know exactly what happened here. Currently, the rubber industry is seeing massive global material shortages of several of the highest demand rubbers (AEM / VAMAC, and FKM). As a result, these materials have increased in price by anywhere from 100%, to 1000%, and that is if we can even get the material at all. So now, at the previously agreed price for our parts that was set years ago, we are taking a huge loss on the parts we supply, as we are paying more for raw material then the customer is paying for the final molded product. So, we ask our customer to adjust price according to the new material price and we provide proof that the material tripled in price. However, sometimes the customer will just outright say no, and tell us that we are required to continue supplying at the current price while taking losses of 10's of millions of dollars per year indefinitely because they just don't want to pay more. For this reason, I agree with this change. Yes, it can be abused, but it can also be abused the other way around (and often is).
It seems like an oversight not to include a clause specifically allowing for price adjustments based on unforeseen increases in the cost of raw materials. Force majeure. I bet they add one going forward
@@MrJeffcoley1 it most likely already is one but it is most likely capped at a set rate per year or so, but this inflation has been on part or worst than the great depression and everything is going up at an unpredictable rate. This leaves the producers with the shit end of the stick and I agree with the court on this one, basically they tiltes the favor in the contract to heavily to one sides favor. In Chris place I bit not only are the company's that refuse to up price keeping their cost lower, but they then sale the product at a huge mark up for a massive profit at his company's loss.
I spent over 30 years as an employee of a fairly large municipal government. Part of my job was to write contracts. These contracts had to go by both the city attorney and city engineer before they went out for bid. Every tiny little detail had to be included. Despite that, we constantly had problems. One of the last big contracts we did before I retired was to have the roofs replaced on 600+ buildings. I had experience in construction. It had become common practice to install asphalt shingles with staples. It was cheaper, easier, and faster to do it that way, but staples did not hold nearly as well as nails. We had a lot of shingles blow off. So I put in the contract that the shingles were to be installed with nails. I even specified the type and size of nails. The engineer and attorney approved that part of the contract. So the bidding took place, and a roofing company was awarded the job. I went out to inspect their work on the first day, and found them using staples. I immediately told them to stop, and called the head of the company. His response was that nobody used nails anymore. I replied that I knew that, which is why I specifically put that in the contract. The job was halted, and things were turned over to the city attorney, who at first tried to amend the contract. Fortunately the engineer was on my side. The contractor was given a copy of the contract before bidding on it, and confirmed they had read it before signing it. A couple of months went by, the city attorney was about to call in the contractors bond, when they agreed to do the job as spelled out in the contract. We had someone out to the job sites on a daily basis to make sure they were doing what they were supposed to do. The job did get finished, but I believe the company went out of business not long after. It is extremely important to have EVERYTHING spelled out in any contract. You need to know you are getting exactly what you are paying for, and the contractor needs to know exactly what they are bidding on or agreeing to.
Good for you. You had this nailed down tight. Too many times noncompliance with contract specifications and performance standards are overlooked. Sometimes the over-lookers get fancy vacations or other "perks" for their overlooking. The problem goes quite high.
In an example, like this, I would think that whoever is negotiating the final signature would make sure a few things were going to be followed just to save everyone trouble. I’ve done that before even though I’ve only had a couple of contracts. For instance, when I built my house, there were a couple things that I knew I had put in that were different than standard. So when we were meeting with the builder, I asked about those specifics. One of them had been completely missed. Trying to hold them to the contract would have been legally easy, but practically caused me headaches.
As someone who had a residential shingle replacement job performed, with small headed nails that fasten the shingles to the roof that continue to fail, I would caution other homeowners to also specify nail dimensions. The devil is indeed, "In the details".Arguments from a contractor that, "No one does that (thing) anymore" have no bearing on a proper process.
Not that I think the ruling is bad, but what wasn't in the contract? They agreed to provide a product, they agreed to the price, they agreed to a duration, and they agreed to not knowing the quantity by not including one.
The third option would be what happened in 2020 where the auto manufacturers were sitting on cars and stopped producing. I was an engineer at a tier 1 auto supplier for a long time. Our contracts always had quantities, the fact these companies didn't do that is very strange to me. Any major auto manufacturer will commit to a minimum quantity to a supplier. We also had these contracts with our tier 2 suppliers. It amazes me there's usually no clause about inflation or cost of raw materials in these deals as this situation comes up often. In fact conversely a lot of these contracts have some sort of efficiency clause where the cost goes down year over year under the assumption production will weed out the production scrap throughout the life of the program. Often I've had design changes that were objectively better in every way denied on the grounds that the current product was being procured below market value and implementing a design change would allow the supplier to quote again at a hire price given the current cost of raw materials. Really frustrating when you know you could easily make a product better but the lawyers say no.
So i used to work for a small automotive supplier that would supply a larger supplier. The crap the larger supplier would pull on us even though they had a contract was insane. They would submit orders for the week then halfway through change what they wanted delivered and would tell us tough deal with it. Along with a bunch of other bs. My boss said it best i think. Automotive is a game of who can screw the other guy faster. ( he used more colorful language) im so glad im out of it.
Hey, I worked for one of those larger auto suppliers...maybe the largest, not sure. Our end assembly customers would pull this crap with us too....and our lead times were 12-20 months, so crap rolls downhill. They would say "Hey!, I don't have a crystal ball, I don't know how many cars, motorcycles, jetski's, (whatever) we'll sell. Many times, I had to guess, so I applaud this ruling. It should make it easier for Supply Chain Planners to do their job, which will be good for everyone in the USA (except end customers who have to do a better job now)
Sounds like one of those purchase agreements for a car when the dealer decides they're not going to sell you the car at the agreed price that you already put a deposit on
Or one of those contracts with a house builder where they decide to sell to another buyer for a higher price because the market shoots up during construction.
Only if they agreed to a contract of a decade length where they agreed to provide an unknown quantity over that time period. Pretty easy fix is to either not sign a decade long contract or add a clause about updating the price periodically.
@@commentinglife6175without a quantity, client could run you out-of business by upping the order by 10-100-1000 times what you anticipated within whatever arbitrary timeline had been set.
@@jamesbael6255 So? Then don't agree to such a foolish contract. Airboss was essentially rewarded by the court for breaking a contract they never should have signed.
@@nodak81 Except previous court precedent was that this type of contract *was* enforceable. In fact, it's still enforceable on a release-by-release basis. Usually how this works when there is a change in price that the other side doesn't agree with is that the seller maintains existing pricing for whatever it has on the shelf giving buyer time to find another source. Good ruling. Great Lehto's Law video. Again.
I was just thinking that this may actually have a positive impact on that front, even if it's not the primary reason for the ruling. Anything that results in less exclusivity is, in some way, a win for R2R.
One more consequence of 'just in time' manufacturing. I've worked in the auto industry making sheet metal stampings for Ford. Our plant kept 60 days raw steel on hand and 15-20 days finished stock. When we had disruptions due to equipment failure, or bad stock deliveries from the steel mill (it happens) we were not on the hook for shutting down a Ford production line. It only failed us once due to a poor management decision to not stock routine spares for one stamping press. Just in time is usually JUST TOO LATE.
I delt with Ford in a similar capacity back in the late 90s, and they sent us rolls of metal we were to use to stamp the parts we made. They sent us metal that would not be acceptable to the final part (rusted, corroded, etc), so we would send it back. We began to suspect they were just sending us back many of those same sub-par rolls, so we began marking them in specific places with specific marks. Sure enough...
@@johnnyhutchinson5394 How did Ford benefit by doing this? (Sorry to be so stupid.) Once the duplicates were discovered, did your company confront Ford, or take other actions? Great story, and I want to know more.
@@reginaschellhaas1395 It didn’t benefit Ford, it was just laziness on somebody’s part. That was the time Ford nearly drove itself into the ground with their poor operations. After that, one of the Ford heirs took over for a while and righted the ship such that they didn’t need the government handouts gm and chrysler took during “Too Big To Fail”. Our company told them about the bad metal, all we were told was either a denial or “we’ll look into it”.
@@johnnyhutchinson5394 Thank you! So, a poor quality employee And poor quality operations. Even if they didn't care about $$$, I suspect this situation posed a financial and time-lost burden on your company.
New on one me. I've been an engineer in the electronics industry, for 40 years. I always just assumed that the parts price was only good for each purchase. When you bought the next batch of parts, they may have a new price. Guess that's why they chained me inside the engineering department, and away from purchasing. I just thought they where keeping me away from the pretty purchasing agents. I'll go drag my knuckles back into my cage.
We used to have laws in Australia that any vehicle sold new here, must have spare parts available from manufacturer for 10 years. A few brands have ran foul of that law. One of our big 3, Holden, prematurely ran out of tail light assemblies, and the tooling wasn't useable anymore.
This all could have been prevented had the contract simply stated "a quantity not to exceed" and then a number. If that number is hit, a new contract needs to be agreed upon. I agree with this ruling, since without a terminating quantity one could argue "we want a gazillion of them, so they have to provide them", where a gazillion is simply not even possible.
Works great...on paper. Although you are correct, due to long lead times of 12-24 months, no customer would agree to this...and you would go out of business. Customers tell suppliers what to do (except in communist societies where suppliers tell customers). As you, I applaud this ruling to force end customers to give suppliers a reasonable estimate and more price detailed contracts.
Expecting a valid contract to not include an amount is kind of wild to me. It is practically a blank check for demanded supply. I can see why some industries would want to work this way but you take the pit falls of doing so with it. It's good to have good relations with a supplier and a supplier that backs out of a previous business understanding should probably be questioned by future partners (such as "for what reason did you back out and why should we trust you?") but to require them to abide by a terms that was never finalized is not ok with me. Writing reasons to be able to break a contract and what would be owed is always a good idea to hash out by the way.
Companies in USA are greedy and will accept vague contracts just to get the sale. Then when it goes bad, Mgt will put all the blame on an innocent Supply Chain Planner who had nothing to do with the contract.
I've only ever seen contracts like that where the contract creates the basis for a working agreement, sets the expected delivery standards for the goods, and then for each actual delivery a PO is issued for the number of items required. THAT PO will then also set the actual price to be paid.
Yup, seems unreasonable in every way. Imagine that the costs go up past the negotiated price such that the seller has to sell at a loss. Imagine other people want to buy the product for more than that negotiated price - even better since everyone else is selling them at a much higher price because of the cost increase. Now, the original buyer could buy up to indefinite amounts from the original seller and resell to everyone else making massive profits at no risk, while the original seller is collasping. The original seller is apparently on the hook to provide no matter how many are requested? For potentially years? Seems like that *should* be unenforceable - its basically slavery.
Always amazes me how lower courts get it wrong despite looking at the same statues. How did the lower courts miss the wording about ".. quantity of goods set forth in the writing." HOW?
You also see parts manufacture become so dependent on a single auto company for orders. That the auto company will use that dependency to leverage the parts manufacture in to lowering it price to the point they will run in the red on some parts. Chrysler under Cerberus ownership did this to TRW on sealed ball joints and tie rods they supplied years ago. TRW to save money put less grease in the ball joints they supplied on several modals for Chrysler cars and Jeeps. This resulted in premature wear and failure and accidents. As they would separate causing the suspension to fail going down the road. This resulted in lawsuits by auto owners and eventually a recall by Chrysler.
Chrysler loves the idea of premature wear. They had the genius idea in the early 1980s to use nylon raceways in front wheel bearings on some of their models. My parent's 81 Plymouth station wagon had such parts. Eventually an aftermarket part came around with steel in the raceways, but the stealership wouldn't install it because it wasn't a Chrysler part.
My dad and a friend of his used to make the T-top seals for GM cars, in a garage. (Installation was done at Cars and Concepts in Brighton.) Contracts were open-ended and pricing could fluctuate based on material cost. But, this was the early 80's....
If there was no "quantity" in the contract, it can't be fulfilled, and thus, would not be indefinite, so it must be void, if even only after delivery of one of the items in question. Otherwise, the contract has no end terms, and contracts can't live on forever legally. No such thing as a "lifetime" supply of goods, just as there is no such thing as a "lifetime" warranty.
Found out that "lifetime" is legally 7 years .. I bought a few things with a lifetime warranty and as of late went to use my lifetime warranty just to find out the legal terms
Sorry to rain on your parade but 'indefinite duration, indefinite quantity' aka IDIQ Contracts have been placed by the US government for decades. They all have a termination caluse which allows the seller to stop selling at any time, or subject to a time period.
Thanks for clarification of this. I have run into this a bit, and it may be a partial reason for the bankruptcy of the business "Hoffman Estates" (sears/ kmart). The exchange of broken tools! I don't think most abused this, however, say I took in a (one) broken screwdriver. The store staff may open a set for that one screwdriver, creating a non standard set, extra work and expense.
@tomboone201 I've read 7, 15, 25, along with other vague statements indicating what lifetime warranty means. I've also had different reps, such as of tool companies (Snapon, Matco...) decline a lifetime on certain items and others accept the same item that was previously declined warranty replacement. So... I just keep asking when I have something that says lifetime warranty. Usually ends up getting covered, at least in the situations I've been in.
@@danielkoontz6732 great .. I guess it depends on the salesman at the time, I took back something that I paid extra for the like time warranty.. 20 yrs later and that's what I was told but they could give me a deeply discounted price to replace it .. he hired me to do his door so I added in that price to the job a let him pay for it
I made Blanket PO's for years and the ERP system I used would not even let the PO process until I entered the time length, pricing and total quantity of the PO. With the Blanket I could tell my vender that in one year I want 1000 and I would notify the vendor when and in what quantities I wanted items sent, until I used up the 1000. If I did not ask for enough deliveries to use up the 1000 the vendor would send the remaining items on the PO, at the end of the year. It is sad to see, for vendors to get business, they need to even consider taking a PO with so little security and production scheduling.
It blows my mind that suppliers have been on the hook with contracts at specific prices for some indefinite amount of time. And this had to reach higher courts to get this result? Good grief. I can only imagine the industry has been used to litigating and winning even dumber cases.
If suppliers weren't so greedy, they wouldn't accept those horrible vague contracts, but where there's greed, there's laws. And I applaud this one.....however, about 100yrs too late.
Typical case of a very large company with infinitely deep pockets lording it over far smaller suppliers with a shoe string budget who can't usually afford to pay the cost of long drawn out legal proceedings to fight those customers (and would go broke if they lost their contract). Only change is that now the supplier will go broke faster if they don't fight it because of the hyper inflation of raw material prices.
@@jwenting That is where a smart company will insist on the price to include raw material cost increases. For example, when the cost of on-board computers skyrocketed because of supply demands, we saw the manufacturers increase their prices because there was no other suppliers.
@@musicloverme3993 that's now how things work in contracts between multinationals and small/medium businesses. The multinational can do what they want, the other party is locked in and can't do anything because they're utterly dependent on the multinational for their very existence more often than not.
I remember business law class in Germany in the early 2000s (not law school). The simple purchase of things in German law goes something like this: A price is shown by a seller. This is "An invitation to make an offer" to a buyer. The buyer then "offers to buy" - then the seller "agrees to take the offer" - then the next 2 things can happen either simultaneously or in either order: The buyer fulfills their part of the contract, and the seller fulfills their part of the contract. Then both - separately and jointly - agree that the purchase is over. The reason it's that complicated is because there are separate remedies for each of those steps falling apart. And because this is so complicated, in Germany, you need to be at least 7 years of age to make a purchase of any kind. If you sell anything to a 6yo, the parents can come back and say that the child wasn't able to make a purchase. Little addendum: A child that saves its allowance and makes a big purchase from only the money from the allowance, let's say a gaming console, and that child is still a minor but at least 7 years old, the parents cannot make this purchase reversed. Allowance is sole property of the child and so then is the console. Also, cutting allowance as punishment is child abuse in Germany. You don't HAVE TO give allowance, but if you do, you are obligated as parent to not abuse that.
That is one of the dumbest things I have ever read. Allowance is a privilege that is earned through good behavior. No wonder Germany is so messed up these days.
That sounds a lot like the contract law in England/Wales - although the law concerning a minor is a bit different... A minor (under 18 years) cannot form a binding contract except for "necessities" - this can include food, clothing, apprenticeship...
@@colinprice712 Yes, that's the same, however, a child can buy things beyond necessities - or you really, really have to define "necessities" very, very loosely. For example, carnival rides, etc. So, if I remember correctly, in Germany, the child can act as agent of their parent, for example, pick up an order, or purchase something on behest. To state "this can get complicated" is an understatement. But the general rule is that money a child earns (with exceptions of family business or child actor etc.,15 and up) or gets as allowance, it can make simple purchases, but not things like subscriptions or spend money beyond that, for example, from a birthday present not dedicated to that purchase.
@@stuckgrenadepin.225 Oh, you mean occasional gifts and rewards! Yea, that's not allowance. Allowance is something you give a child so it can learn how to budget and start to learn managing expenses. For example, start buying their own clothes. An argument with the caregiver does not mean they won't have expenses, and that's why this is abusive. If you preclude an interaction like giving an allowance under conditions, I bet your relationship with your child is on rocky grounds to begin with, and you seem to really miss better tools in communication and negotiation. So, if my son messes up in any way, I use that as a teaching moment with the issue at hand as the center of it - I don't pull in weight as in "I will show you who is boss" - if I get to this point, I failed as a parent. So far, I didn't fail and my relationship with my child is rock solid.
Hard to believe anyone anywhere ever considered a contract with no statement of quantity to be enforceable. And just so you know, there was NEVER a time when Chevrolet made every part of their cars. When Chevrolet started, a lot of it came from Dodge Brothers.
@@primoroy Ford *did* make everything. He owned steel mills on the Detroit river, cotton looms on the Rouge river, lumber fields in northern Michigan, and rubber plantations in South America. For a while, the only things OEM on a Model Ts were glass and light bulbs.
I heard "Statute of Frauds" but all I could think about afterwards was "Statue of Frogs" and I giggled part way through the rest of the video. I would be a terrible law student.
I know nothing about contract law (or much other law) but it boggles my mind that someone could expect to purchase an infinite amount of whatever “widgets” they need at the same price forever. And this had to go all the way to the Mi Supreme Court? Wow.
It seems obvious to me - have a notification of termination period. Three months, whatever. Have a maximum amount that has to be satisfied per month/week/whatever. There you go. Costs go up? 'We need to raise the price.' 'No.' 'Very well, we are giving notice of termination.' 'Alright, we'll look elsewhere and may get back to you.' Guarantees just-in-time supply up to a reasonable quantity for a reasonable amount of time. Gives both parties time to look elsewhere and renegotiate.
I worked for a company that made plastic security bags that are used by banks and other companies that have bar codes for tracking and so forth. All the purchase orders I had ever seen had quantities involved even if was for a order that would take a year to get done. If the plan was for a million bags, it would usually get broken down into 100,000 bag units with separate purchase orders. Sometimes we would not be able to do up the entire order because somewhere along the way, the buyer would change their mind and decide they would only want half of that order. The terms were for UP TO that million with a opt out every 100,000.
I was told by a driver for a company that had contracts to ship auto parts that some vehicle makes contain some of the same parts that have been in use for years. The reason the auto makers wouldn't change the design of those parts was because they long ago negotiated a low contract price with the suppliers of those parts that was still enforceable.
GM is the wurst (that's a deliberate malapropism). They used the same parts across many models for many years and just kind of hotdogged their way through the design process. Sometimes they continued to use obsolete or superseded part designs, for example the cannister-style gas tank floats way into 1960s. There is a reason why GM cars have always been bologna (another deliberate malapropism). GM is incorrigible and nothing will ever fix that company. As it happens, their design philosophy works better for trucks, where they often start out with more solid components in the first place so that therefore continuing to use them for long periods of time and across many models works out better. I was never a hot rodder or customizer but going back to the era of the 1950s and 1960s, I long ago concluded that GM made the worst new cars and the best used cars. Why is that so? Standardization of parts across many models. It made life easy whether you were getting used parts from the junkyard or getting aftermarket replacement and upgrade parts. Even today, the amount of parts available for small block Chevy V-8s way exceeds what is available for any other engine line.
Look "Traverse belt replacement" u find a videos and photos where "same design" cost customer 4* more because to remove tencioner they use same screw as in other products and screw hit frame, that means u first remove motor, do work and put it back.
A number of years back I was working for a supplier to Bobcat. They had their suppliers set up in a non-standard way at the time. Basically they would provide a blanket PO for the year for the various products. No quantities, just prices. Every week they would provide a production forecast for the upcoming week for the numbers of each version of skid steer they were building. It would be the supplier's responsibility to then figure out how many parts, of which type we had to supply. And we could never be short, nor never ship too many, because each shipment was to be shipped in a crate of 144 units (about a day's supply) and they only had room for 2 crates. They would then pay us based on their production usage of the product, not how many were shipped.
@@GamesFromSpace not really. JIT supply chains in the manufacturing industry are becoming more the norm. Really the only issue was if you shipped a crate of product too early. If they already had 2 crate on their production floor and they received another, it would just end up sitting outside somewhere out of the way. Essentially it got lost and it was the supplier's responsibility. That's when the crap would hit the fan.
I used to work for a bobcat dealer. We stopped being the dealer shortly after I started there. It was a construction equipment dealer. That would happen periodically. We mostly dealt with asphalt equipment, but we had other equipment too.
yeah... but here, it look like the supplier is forced to alone eat the inflation costs, because that's probably what it is. They didn't say, we're not making this part anymore. They said, we're not making the part at THIS price anymore. Meanwhile, the buyer is probably applying the inflated cost to the final customer, but want to keep the difference for himself.
@kolerick oh i don't disagree, but non open ended agreements like this adds value to standardization if you order too many of a standardized part... oh no, you put it in something else. I understand the influence is not great. However, on large scales, that small influence could have a non inconsequential impact.
All they had to do was to include a minimum and maximum number in the original contract. I supported a software program used by federal contracting officers. Their contracts were governed by the FAR (Federal Acquisition Regulation) So teaching folks how to use it I also had to learn a bit about how contracting worked for all those types of contracts from Requisitions, Purchase Requests, Solicitations, Contracts and Amendments to contracts. It was normal for the contract to stipulate an upper and lower number of items on a contract, that protected both parties because if a company was willing to commit to a contract they, had a reasonable expectation to know how much they had to supply at the agreed upon price. Sometimes their might not be a minimum number for purchase but it was very common to have an upper limit. When that limit was reached the contract would have to be amended to change that upper number and/or the price. Interesting that a company would not protect themselves from price increases with contract clauses to limit their liability if prices of materials to them jumped up.
I would just create a contract for 60k seats with an option for an additional 40k seats at a set price. If sales go up then an additional purchase order would have to be entered into for the extra seats as costs may have went up for the manufacturer of the seats. No one can predict the future prices of materials to make the extra desired goods.
@@kenbrown2808 Hence the ruling. Manufacturers squeezed suppliers and made contracts less and less fair for suppliers over time. It finally crossed the line into illegality, so the law is doing its job to prevent enforceable contracts from being pure nonsense. Law makers should probably look at these contracts and determine if any new rules are needed to prevent shenanigans.
@@_PatrickO I think i found solution, it's simple if cost for manufacturing is above cost of production, they should create separate company who goes to court and tell "this company is dumping prices, their cost isn't cover by buyer".
I came across this randomly and I have now subscribed - your ability to explain this stuff in a really easy to swallow way is fantastic and it just so happens that I’m currently working on some thing where I just could not think of a way to explain why one contract set in place prior to the secondary contract was not applicably on the same level as the current contract - your explanation makes my dilemma a lot more tangibly understandable and thank you because I was really was struggling to find a sound place from which to move forward. I knew that there was a hole in the armor of what the other party has constructed on paper -but I could not think of a good way to put it into words- - I hope you don’t mind but I may be borrowing your explanation as a analogy in regards ❤ Now I just need to figure out how to explain why bringing it towards the court in such a fashion that it only references the first contract, only contests or discusses the first contract and seemingly doesn’t acknowledge the existence of the second one is problematic and also should result in being dismissed thereby in forcing them to return in a fashion that addresses the secondary, Current and applicable contract, which is similar to as you explained with the auto parts has a completely different regulatory meaning than the first one which is more of a piecemeal sort of circumstance I don’t know if you check these comments but in case you do is there anything in your videos that I could possibly jump to that might address something similar ?
Thank you. I don’t know how I wasn’t already subscribed, because I watch his videos all the time. It was my oversight, which has now been rectified. 😂😂
Specific Quantity, Specific Time, Specific unit price, & Delivery Agreement come to mind. It is quite interesting visiting a Ford Truck Assembly Plant. I am sure the other manufacturers do it the same way. The Auto manufactures used to use a Just in Time Inventory... I guess now they hope for the best!
My old company did "blanket purchase orders" all the time. They were usually good for a year. They are purely an accounting item. It eliminates going through various levels of approvals every time those standard items are ordered. It is an entire different team (at both companies) that actually handles the orders (supply chain/purchasing). They also set up the specs and provide the forecasts.
Not just the auto industry but all manufacturing/sales I operated an appliance store and sold refrigerators, ovens, laundry and etc. Manufactures like Magic Chef, WCI, and Maytag held UCC's on my business to ensure they got paid. When I severed my relationships with a company, I had to make certain the released their UCC at my local court house.
So basically they wanted to lock AirBoss into this contract that would force them to keep giving them the parts at a set price even while the rise in the cost of materials increases to the point that doing so will destroy the supplier... very short-sighted.
For me even if AirBoss lose in higher court they can opt-out by going to Dept of commerce and self snich and told they have contract with "less than fair value"
Govs fault. Law should say buyer and seller must state quantity and cost per unit must be stated in contract. Contract must completed unless bankruptcy claimed by either. Or manufacturer cannot get needed materials. That should be law.
Thx SL. This just helped us understand our choices with a future parts supplier as we are about to launch a sm biz. It sheds light on do we agree to a quantity or not. Which will determine the type of agreement(s) we'll be choosing for boxes.
This is probably the densest Steve Lehto video i have ever seen in terms of the niche and complex discussion and topic. Very informative but maybe over my head.
I've made the outside of valve guides smooth and to the right diameter. I've ground the contact gears of engine starters to a specific level of roughness and to the right angle and diameter. I've put the center hole and gasket rims in a few thousand of those pistons that hold up RV windows. With all of these jobs and parts the two consistent things were the use of offset grinding, and COcentricity. That is having the outside AND inside of an object completely parallel. No shake. No wobble. No tearing itself apart. And no, a good fifteen years away from the last time I've used the formula for calculating cocentricity... I've TOTALLY FORGOTTEN IT! Not sure how I feel about it. It's only been useful twice outside of work. Once setting up a rotating teepee. Carved three diameters of ash tree poles and hinges thick enough to last at least two years. (lasted six) The second was to set up a wooden sliding door made from scratch!
I never heard of cocentricity, very interesting. Will research, thanks. I have formulas that I used to know. One calculated the volume of liquid in a cylinder, very helpful and I used it often.
Dont forget that theres a lot of intermediate suppliers too, that are just storages, not manufacturers, that often supply sub assemblies to both end users and repair/modification/etc shops, that will also have to deal with this, so the spare parts markets will also (probably) get fairly sticky
Not just the auto industry. The federal government, US Army Corps of Engineers in particular, issues IDIQ contracts. Essentially they are annual (usually) contracts with various contractors for services they anticipate using in the upcoming year. It saves time (not having to bid each time) and locks in a rate for the year. For instance, asphalt paving (with corresponding specs) at $100/ sq. yd., up to 50,000 square yards. Then when an appropriate project comes up (pave VA parking lot), it’s easy to issue a contract and start quickly. Also used a lot for emergency services/supplies (e.g., bottled water). Durations are usually specified, but not amounts.
Had an interesting "contract" kerfuffel at a place I worked for until last year. We manufactured industrial, janitorial and household cleaners, mainly liquid, for which the packaging was mainly 4 liter jugs or 20 liter pails. While we were in the interior of British Columbia there just happened to be a plant a couple of blocks away that produced the jugs. My boss liked to support local businesses, the price per unit was industry average but the cherry on top (for us) was they were close. Instead of paying for freight from Vancouver, Calgary or - horrors- Ontario, these guys were practically next door. We could have an empty truck from one of our shippers, coming north to their depot, stop, pick up ten or so skids of jugs, drop them off with us and we'd load our outgoing freight. Everyone was happy. We had an agreement (of the gentleman's variety) with the plastic plant and a revolving purchase order with price and for quantity (we'd order as needed from our agreed upon quantity as needed - they made the same product for others so there was no special ordering). Then Covid hit and supply chains disintegrated, prices for everything went up if you could even find raw materials. My boss wasn't an a-hole, and realized that our cost per jug would go up, as that was the new reality for everyone. But the uncle running this family owned plastic business saw gold in them thar hills and decided to do something really stupid. Without notice he cut us off entirely and did the same to every one of his customers in the interior of BC, leaving all of us scrambling for alternate and hugely more expensive alternative suppliers. His reasoning? He could make a lot more money gouging big companies in Vancouver than he could with all us small time operators. We, like all of their former customers adapted though it was difficult. The fallout was interesting. Turned out that in this case the shortage of plastic pellets they used for injection molding was relatively short lived and the big boys in the city reverted to their regular suppliers. My boss was somewhat connected to other customers in our area who had been dumped and had to scramble for plastic jugs or bottles and they were all of the same opinion. We had sourced other suppliers at great cost and trouble and there was no way in hell we'd ever do business with this company again. There must have been some family drama because the uncle was ousted and some young guy (a nephew or some damned creature) came crawling to my boss, apologizing and begging to go back to the way it was. My former boss is a good fellow and can forgive a lot, but the young guy was told to get off the property and never come back. Word was that that was the same response he got from a lot of the customers they'd screwed over. A gentleman's or handshake agreement can work just fine until one party decides to be a dink. Last I heard the plastic company was laying people off and working short shifts.
given that inflation has been as high as 15% for 2 years or more, I think its a safe bet that the cost to produce the product really has gone up dramatically. it is fair for the producer to say he cant meet the old sale price anymore and they have to either get paid more or stop accepting orders. We've all experienced this ourselves at the grocery store or when paying bills. Has anyone NOT noticed prices going up dramatically in the last 3 years? the same is happening to the supplier on his purchase of raw materials. eventually he MUST pass that on to the customer or he will go bankrupt.
In Dod we called those contracts IDIQ, Indefinite Quantity Indefinite Amount. Basically I want to buy a bunch of something, parts, services over a period of time, usually 5 years. Don't know how many or for how much. Prices can change and the contract can be changed over the length of the contract. We write task orders against the basic contract which spells how many and how much we want at that time. I'm now retired but that work well for us.
The reason that auto manufacturers once built everything in house was to avoid situations with external suppliers. The bean counters started running companies and found that they could buy some components cheaper than they could produce the product themselves and began outsourcing along with implementing Taiichi Ohno's "Just In Time" system so parts were delivered and purchased as needed. Any disruption in any part of that supply chain, shuts down the entire assembly line. There are no spare parts to cover a shortage. Without a definite number of the parts the automaker will buy, the supplier can't secure the exact amount of supplies they will need. The suppliers are also run by bean counters who want to purchase those supplies as needed so they don't have money tied up in supplies and storage. We recently witnessed how such systems failed during the pandemic. Any shortfall anywhere hits the end user almost immediately.
GM at some point went to their suppliers and dictated what the suppliers profit margin should be based on the suppliers cost to manufacture. The threat was sell at this price or we will find another supplier who will. A crude attempt at cost control.
JIT works great in Japan,, where subbies are clustered around the main assembler plant. And you have a small geographical area. In the US and Austraya, subbies can be far from the main assembler plant. Interruptions occur and shut down the main assembler plant. The main assembler plant is screwed.
Either put the quantities in the contract or if the price to manufacture increases to a specified percentile, the contract automatically amends, giving the buyer or the seller an out.
The big box stores have mastered putting companies out of business, I worked for a large American manufacturer when Home Depot came by and said we need say 1 million of these in the coming year and we will pay $X amount per, the catch was in order for the company to meet this demand they had to drop all of their other customers. Then the following year they said we're only willing to pay half of what we paid you last year for the same amount, this was a big hit but since they let go all the other buyers they had no choice and once again it was only a one year contract, suffice it to say they went bankrupt after the third year. This is a tactic used by all of the big box stores especially Walmart, the greedy stay greedy and the common folk suffer.
Years ago, a certain grocery store chain would charge a premium for shelf space to a new supplier. This was only viable for the supplier if they could spread the costs over several years. The chain would drop the contract in early years, preventing suppliers from recouping the premiums. Then the chain could make money, once again, by engaging a new supplier and receiving the upfront premiums.
The military have "Indefinite Delivery, Indefinite Quantity" (IDIQ) contracts but they are over a fixed term, and can include what is essentially "cost plus" terms, so the supplier doesn't have to absorb rises in materials or labor or other costs during the term of the contract. Then again, military procurement isn't known for necessarily finding the cheapest way of procuring a particular item from a supplier.
I listen to this contract dispute and I put it right next to the judge who last month decided a thumbs up emoji is as valid as a signature and I wonder how far detached from reality are these judges?
Hi Steve.. I have worked at a few of those automotive parts suppliers over the years . One was Findly industries. in West Carrollton, Ohio which built and supplied seats for the truck and bus plant in nearby..Moraine, Ohio. The number of seats produced was determined ny an order of manufacture by the line of the assembly plant in order of build a 4 letter code dictatad type color material and electric or manual seat...from basic S-10 seats to leather Oldsmobile Bravada, leather rpower or manual, with or without lumbar support manual or power versions... we went by the requirements of the assembly line in said plant...another war automotive electronics of Sarasota FL which re manufactured automotive alternator stator cores from a very small Mitsubishi 12 V 60 amp model to a ,triple core, delta wound Lease Neville at 24V--240 amp alternator used in the M1A1 Abrams main battle tank it weighed about 40 lbs before packaging...lol about the size of a basketball...built for the Us Military...as well as standard GM, Ford and Chrystler models.....bare cores were delivered then cleaned assembled with all new internals for the alternator manufacture... another was a plant which built tachometers for a supplier to speed shops all over the world.. i don't know the name of the customers of that one.. so I understand what you're talking about in regards to the order variations and why there is sometimes no set number per order it varies in relation to needs of the customers of the buyer/manufacture of the larger assembly on the production line or manufacturer of a sub assembly thru to main assembly and so forth.. supply chain from basic part through to final full assembly for line production of the final product can be like a big bowl of spaghetti sort of like under the dashboard of any modern car you care to name...lol and people wonder why supply chain issues cause so much havoc for day to day purchasing of any modern item...lol Ive seem it from the inside and outside.... shipping can mess up many things along the way from raw materials through to end product delivery to your door...
Thank you for this. I'm a layperson with no direct involvement with these sorts of things and I really enjoy learning more about how the logistics of huge industries can work (or not work), and all the weird specifics involved. You've explained this well and enjoyably. Would anybody happen to know if these sorts of contracts could occur in sorta tiers? "We'll buy up to 100, 000 at price x" and then "we'll buy 100, 001 - 250,000 at price y" or something like that? That seems like one way to prepare for elastic demand situations.
I was an IT consultant to the Federal Government for decades. They would love to write "task orders" under a broad IDIQ contract. IDIQ is Indefinite Delivery, Indefinite Quantity. This means the contract covers the rate and general terms, but does not specify either the date/time of the work, or the expected number of hours. We always just considered the overall contract to be a hunting license. You were allowed to hunt for task orders.
This is why government interference in the economy screws things up so much. The economy has so many working parts, you can't know the wants and needs of the market, let alone the individuals. You "fix" one thing, but you create a dozen others because it works like a machine with millions of working parts. On that note, a judicial system is absolutely needed to work out problems, but here again, the laws must be simple and easy to follow. I enjoy this channel a lot. You explain things well enough for us simple minded folks. :)
You reminded me of a company in Brighton, MI. They were making the 5hr Energy Drinks but had no contract. Then, 5hr took their business elsewhere. The company in Brighton closed shortly thereafter.
Although unfair, a contract is a contract. A powerful lesson here. It used to that one side did not bother adding out clauses because the risk was very low to them. In this case the seller never dreamed of such increases in raw materials over the life of the contract. Contracts can hurt on either side unless you clearly protect your interests.
Before I retired I did a number of requirements contracts. The contracts had lengthy and very detailed product specifications as well as terms and conditions for delivery, warranty, etc. But they typically were indefinite quantity. However, they always had a guaranteed minimum quantity. Individual purchases were purchase orders against the contract and beyond the minimum I had to accept the order, or not.
Um , back in the 80s , there was a policy adopted called JUST IN TIME , where a manufacturer built things with just the parts in house , and ordered more as they needed . The idea was to not keep too many finished product on the shelf . It cost money to keep many products in storage until it is sold . Many businesses went under .
Spent 20 years in auto as a tier 1 supplier. I see this as a huge win. Because the two scenarios we used to see all the time - 1. Big auto (ahem ford) would say they want a huge amount and then after you run at rate, would send through garbage orders causing you to lose money but still require you to which wouldn’t even cover capital costs. What was crazy after was the yearly demand to pass in depth 24 hour run at rates which would give you in some cases months of inventory to manage. 2. You’d get big auto (and this was all of them), which would provide orders. Prices would be determined at that volume, and then they would strong arm you into providing orders 50% above maximums called in the contract. You would get charged for downtime and quickly be putting your people through 7 day weeks with 12 hour shifts and no maintenance time. I remember quite a few fights over those situations and can remember getting charged for downtime at plants even though it was well beyond capacity. This will finally not screw the suppliers….
To do a new product, specific to a client (ie a car seat). You could contract it as a minimum price that will get you up to a certain amount of seats and there after a price per seat(set). Or a cost up front for development and setting up production and a price per seat/set. And have a clause that let's you adjust pricing if circumstances dictate it. These circumstances can be mentioned in the contract ofcourse.
I work in chemical distribution and we provide order acknowledgements on all purchase orders that the price is updated and agreed by the buyer before material is shipped. This has been important during COVID due to supply issues.
I've been a controls engineer for 25 years and this is my cardinal rule of engineering: - Never trust a vendor. - Particularly, never trust a vendor to make decisions for you. - If you must trust a vendor, trust but verify. - Even with a contract, still don't trust a vendor
I was having a new roof put on a house I refurbished from the foundation up and remodeled (addition). My roofing contractor that I have used for over 30 years told me they were no longer allowed to use staples on certain types of shingles or it would void the warranty. He hand nailed all his roofs. That was fine with me as I have done my fair share of putting on shingles by hand nailing. I look at it that, you get what you pay for. I know many roofers now use coil nailers which amounts to the same as hand nailing. now i'm retired but would still use my regular roofer.
Maybe companies should train their buyers on how to write clear cotracts. There are always gaps and oversights, but not having a quantity or at least a quantity range is inexcusable. Leaving a gap like that in the contract leads to misunderstandings and having hostile suppliers who maliciously comply with the contract until they can get out of it.
Another reason fights break out is mainly because when they all of a sudden say let there be seats and open up 2 more lines to put them in the car, now the supplier has to pay everyone overtime or the contract holder bitches about how long it is taking to get seats, sometimes they hire temps just for the duration of the contract. either way and sometimes both, BIG difference in juice vs squeeze.
I worked in a machine shop that had a bunch of a very specific type of "CNC" machine that's only really used by the auto-parts industry in the US. We looked at outsourcing two similar parts to one of those auto-parts companies to free up one of our machines so we could be more flexible. The absolute minimum part order they would entertain was "one part per machine, 24/7, for a year." They preferred 3 year contracts.
I think these contacts should stipulate a minimum the buyer will buy and a maximum the supplier will sell at a given price as well as an end date to the contract. This way the buyer is on the hook to buy the minimum number of units and the seller is obligated to sell the maximum by a certain date. These contacts should also stipulate delivery times, say 1,000 units a month. This way, both parties are protected and obligated by these terms of said contract.
So does this only apply to the state that ruled on it? Then could they just add a vague number to the purchase agreement or PO, say a minimum of 1, and a max of a million?
For now yes only in Michigan, but other states will likely build upon it or reject it depending on their case law at hand. What is nice about the American system is that each state generally follows its own line of legal reasoning but some rulings are so well written and explained that they almost get adopted wholesale by the other states, especially when it comes to the Uniform Acts that have become a major part of state law. The Uniform Commercial Code was highly controversial because many states had their own laws and rulings on the subject of the Commercial Code, but the standardization of the Commercial Code and many other Uniform Acts has ensured a rather nice and for the most part smooth application of a set of laws that have become streamlined to where they can be reasonably presumed to have much the same procedures and understandings between all the states.
Auto parts supply chain is crazy . I drove a truck, I would pick up finish painted left front steering spindles in Traverse City, MI. Delivered to Laredo, TX .trans shipped to Mexico then back ,Pick up a load of the same part with bearings installed, Delivered to Tennessee Auto plant . Dead head to Pennsylvania pick up raw castings to drop off in New Jersey to be machined, Pick up machined parts Delivered to New York for X ray inspection. Pick up machined and inspected parts cross from New York through Canada back to Traverse City where the parts are painted and repeat . And that's 1 part !
the big three automakers practiced this stuff and put their suppliers out of business. eventually they were in a pickle because they didn't have suppliers . they used to have yearly price reductions built in to contracts. i think they found out that can't work.
The government has contracts called BPA(Blank Purchase Agreement) which is as described, a defined time and price but not quantity. During the life of the BPA, the government promises to use that contracted company as sole source for their agreed product, but in doing so they agree to a set price. I personally have dealt with companies that had that BPA cancel orders and then try to sell me that exact product at a large markup...after talking to our contracting agents...it was passed up and seems to have not worked out well for them. This story makes me think the Federal Supreme Court will step in due to the large amount of BPA out there.
I used to be a purchasing manager for an industrial bearing manufacturer and I never would have released a purchase order without a definite quantity. Not as large as automotive OEMs but still, a quantity must be agreed by both parties.
Some of my customers "I don't have a crystal ball !. I don't know what I'll need. My Boss" Well, you better find out or you're fired". Our lead times were 14-20 months to produced parts. I had to guess. Sometimes my guesses was spot on, sometimes, I ended up with too much stock (which I pleaded our aftmkt div to take) or not enough, almost closing the Harley D factory, Polaris jetski factory etc. For over 20yrs, I was always afraid I was gonna get fired. The job sucked but most people working there were great. This ruling should make it easier for Supply Chain Planners.
In one of your previous videos, you had mentioned a lawyer that like to make a defense that the manufacturers were not manufacturers anymore, but assemblers. And thus they should not be held liable. Makes me laugh each and every time I think of it
