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Learning Activity –
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.