JÄGER Busi­ness Blog

Are frame­work con­tracts for
rub­ber and plas­tics worthwhile?

27.10.2021   |   Jörg Zitzelsberger

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Indi­vid­ual orders are a pop­u­lar pur­chas­ing strat­e­gy for pro­duc­tion com­pa­nies that want to be flex­i­ble in their mate­ri­als pro­cure­ment. This approach promis­es favor­able pur­chas­ing prices, as orga­ni­za­tions can always choose the most favor­able sup­pli­er when need­ed. How­ev­er, it also involves risks, because in times of cri­sis, occa­sion­al cus­tomers often lose out. It can there­fore make sense for pro­duc­tion com­pa­nies to secure their mate­r­i­al require­ments through long-term frame­work con­tracts instead.

Indi­vid­ual orders are prob­lem­at­ic in times of crisis

In line with the just-in-time phi­los­o­phy, many com­pa­nies are always keen to keep their inven­to­ries low. Instead, they rely on pre­cise­ly planned deliv­er­ies of goods. As a result, their sup­ply chain man­age­ment is par­tic­u­lar­ly vul­ner­a­ble to dis­rup­tions. The COVID 19 pan­dem­ic has high­light­ed this.

In response to the increased num­ber of cas­es, gov­ern­ments around the world imposed con­tact restric­tions, caus­ing com­pa­nies to reduce their pro­duc­tion out­put. The same applied to all play­ers in the glob­al val­ue chain, right down to raw mate­r­i­al sup­pli­ers, who reduced their pro­duc­tion vol­umes. As Coro­na declined, an eco­nom­ic upswing began and demand for raw mate­ri­als increased faster than sup­pli­ers could meet it. The result was sup­ply short­ages due to pre-mate­r­i­al bot­tle­necks and ris­ing prices.

For com­pa­nies that had con­clud­ed long-term frame­work con­tracts, this was a man­age­able task, as their sup­pli­ers were able to adjust to the sit­u­a­tion. Com­pa­nies that relied on indi­vid­ual orders were in a worse posi­tion. They could not refer to exist­ing con­tracts when nego­ti­at­ing sup­ply con­di­tions. In addi­tion, most sup­pli­ers try to sup­ply their long-stand­ing exist­ing cus­tomers first when there is a short­age of mate­ri­als. Casu­al cus­tomers often lose out in a cri­sis situation.

What are the advan­tages of frame­work contracts?

Frame­work con­tracts reg­u­late the long-term coop­er­a­tion between cus­tomer and sup­pli­er. One of their advan­tages is a high degree of plan­ning secu­ri­ty. The sup­pli­er knows exact­ly which orders he will have to meet in the com­ing months and can pre­pare for them by pro­duc­ing the mate­r­i­al in advance and keep­ing it in stock. The cus­tomer, in turn, can be sure that his deliv­ery will arrive on time. This is par­tic­u­lar­ly rel­e­vant for com­pa­nies that pur­chase indi­vid­u­al­ly man­u­fac­tured rub­ber or plas­tic arti­cles, because no sup­pli­er has such prod­ucts in stock as stan­dard. In such cas­es, indi­vid­ual orders often lead to deliv­ery delays.

Anoth­er advan­tage of frame­work con­tracts is the low nego­ti­a­tion and orga­ni­za­tion effort com­pared to indi­vid­ual orders. The customer’s pur­chas­ing depart­ment only has to nego­ti­ate con­di­tions once, not for each order trans­ac­tion. This sig­nif­i­cant­ly reduces process costs.

In addi­tion, frame­work con­tracts have finan­cial advan­tages. If a cus­tomer orders large quan­ti­ties of a prod­uct at once, the sup­pli­er can achieve scal­ing effects in pro­duc­tion and pass them on in terms of price. For exam­ple, the set­up costs of the machines involved are reduced because the entire order can be han­dled in one piece. The same applies to admin­is­tra­tive costs. In addi­tion, there is greater price sta­bil­i­ty for the goods ordered, as the pur­chase price was fixed when the frame­work con­tract was con­clud­ed. Fur­ther­more these con­di­tions are not sub­ject to fluc­tu­a­tions (apart from con­trac­tu­al­ly agreed exceptions).

Frame­work con­tracts are worthwhile

What are the advan­tages of long-term cooperation?

Apart from the explic­it advan­tages of a frame­work con­tract, long-term coop­er­a­tion with rub­ber and plas­tics sup­pli­ers has some pos­i­tive effects, which are espe­cial­ly notice­able on a social level.

For exam­ple, the con­sul­ta­tion between cus­tomer and sup­pli­er is faster and eas­i­er if there is already a long-stand­ing rela­tion­ship of trust. If the peo­ple respon­si­ble on both sides know each oth­er per­son­al­ly, they can sort out prob­lems and con­flicts more eas­i­ly, often bypass­ing the offi­cial chan­nels. An infor­mal tele­phone con­ver­sa­tion between long-stand­ing busi­ness part­ners, for exam­ple, can resolve deliv­ery delays much more quick­ly than an e‑mail to the supplier’s ser­vice department.

Anoth­er issue is smooth coop­er­a­tion between orga­ni­za­tions that know each oth­er well. Con­flicts often arise because both sides have dif­fer­ent goals or expec­ta­tions that con­tra­dict each oth­er. How­ev­er, if a busi­ness rela­tion­ship has exist­ed for some time, it is like­ly that the cus­tomer and sup­pli­er have real­ized that they are both on the same side and need to approach each oth­er. Com­pa­nies that have been work­ing togeth­er for a long time know how the oth­er part­ner works. They can antic­i­pate poten­tial points of con­flict, know the strengths and weak­ness­es of their busi­ness part­ners and how their con­tacts react in dif­fer­ent sit­u­a­tions. As a result, there are sig­nif­i­cant­ly few­er fric­tion­al losses.

Long-term col­lab­o­ra­tion with sup­pli­ers also pays off from a finan­cial per­spec­tive. For exam­ple, sup­pli­ers often offer bet­ter prices to long-stand­ing cus­tomers because they have an inter­est in con­tin­u­ing the part­ner­ship and take less risk. A cus­tomer who has been pay­ing his invoic­es on time for years will prob­a­bly con­tin­ue to do so. In addi­tion, it is usu­al­ly more prof­itable for man­u­fac­tur­ing com­pa­nies to retain exist­ing sup­pli­ers. Research­ing, con­tact­ing and nego­ti­at­ing con­tracts with new sup­pli­ers is always time-con­sum­ing and only pays off after a while. Once you have found a trust­wor­thy sup­pli­er, you are usu­al­ly bet­ter off mak­ing the coop­er­a­tion long-term.

Con­clu­sion

Con­clud­ing a long-term coop­er­a­tion with sup­pli­ers on the basis of frame­work con­tracts has sev­er­al advan­tages. The cus­tomer ben­e­fits from increased plan­ning secu­ri­ty, reduced admin­is­tra­tive effort in pur­chas­ing, and finan­cial advan­tages result­ing from scal­ing effects. In addi­tion, a trust­ing part­ner­ship often brings effi­cien­cy gains in the inter­ac­tion between cus­tomer and sup­pli­er. This is anoth­er rea­son why it pays to secure your own goods require­ments with frame­work contracts.

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Author: Jörg Zitzelsberger

Jörg Zitzels­berg­er has been part of the Jäger Gum­mi und Kun­st­stoff team since 1993. With many years of expe­ri­ence, he serves our cus­tomers as head of the Stuttgart location.

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