Template Training

Template Training
Procurement Contract Template

Master Supply Agreement Overview Intro to Contracts Why / When are Contracts Necessary Template Introduction Terms & Conditions (Exhibit B) MSA Standard Clauses MSA Optional Clauses Exhibit A: Division Supply Agreement Schedule 1: Products and Pricing Standard Clauses Optional Clauses

What is a Contract? A contract is a binding legal agreement that is enforceable in a court of law Oral vs. Written Contract Evidence of Agreement

What is needed for a complete contract Material Terms clear and unambiguous Objective Meeting of the Mind Must be able to demonstrate the agreement

What is the difference between the commercial terms and the terms and conditions Commercial Terms include terms material to the contract and are governed primarily by the business relationship/supply chain objective Quantity Price Time of Delivery Terms and Conditions include clauses to protect Emerson and are governed primarily by risk management and compliance principles Changes to Terms and Conditions generally require greater legal involvement

Why contract with MSAs, DSAs and SDSAs? Emerson has little protection without a written contract A written purchase order is better than an oral agreement A clear and unambiguous written contract addressing all material terms is the best Such a contract limits evidence of the agreement to the terms within the 4-corners of the document Such a contract provides the basis for a continual business relationship Such a contract may require a lot of work to achieve

When do I need a Contract? Considerations: Spend Criticality Supply Base % of Annual Spend Criticality

Agreement Approval MatrixWe Have the Opportunity to Improve Through Automation! Signatures for Contract: 1)MSA (Corp): Emerson representative with authority to sign for this purchase amount threshold. 2)DSA/SDSA (Div): Division representative with legal authority to sign on behalf of division for that limit of liability

Common Misperceptions of Contracts “I don’t need a contract because nothing will happen to me!” Truth: You have insurance on your Health, Family, House, and Car but not the investments you make on the company’s behalf. “I have a relationship with my suppliers.” Truth: A relationship is defined as a mutual investment of time and effort by both parties. This is exactly what is required to negotiate a contract. A contract IS a relationship without questions. My purchase orders with attached Terms & Conditions are my contracts. I’m covered. Truth: Only upon the successful completion of strict guidelines (varying by US state and country) can a purchase order be considered an integrated contract. Even so, it ONLY provides protection for that particular order. It does not protect anything in the future. You are most likely protected for 1 month and are subject to new pricing/terms without notice.

Why Are Contracts Required? Insurance Policy – Provide protection for future Build Relationships – Demonstrate to Suppliers Emerson commitment. Risk Mitigation International Laws Customs: Import/Export Law compliance Adverse situations (Tight market conditions; supply allocation, etc.) European Community Competition Law – Must ensure compliance given the fragmentation of Emerson division spend SOX – Sarbanes Oxley requires contract management processes and systems in place that reflect these processes Intellectual Property Protection Contracts Are A Tool To Help Ensure Supply Chain Success

Template Selection: Type of Contract When Do I Use a MSA/DSA or SDSA? Single Division Supply Agreements should be used for Division Managed Commodities that are unique to your Division Division Supply Agreements must accompany a Master Supplier Agreement (and therefore represent a potentially leverage-able buying opportunity) Consider: Is this a Strategic Relationship for Emerson? SDSA MSA DSA DSA DSA

Master Supply Agreement Structure DSA is part of a MSA, they must exist together All pieces below are required to make a contract (with the potential exception of option clauses) Master Supply Agreement (Benchmark) Standard MSA Clauses Optional MSA Clauses All pieces needed for a contract Divisional Supply Agreements (multiple) DSA Optional Clauses Terms & Conditions

Where you include a clause depends on whether you want it to apply to every division purchasing from the supplier (in the MSA) or only to a specific division (in the DSA). A MSA is governing over every single corresponding DSA. Thus, as a general policy, Emerson should keep all major clauses, terms and conditions governing every division in the MSA, with division-specific commercial terms included in each DSA. Clause Locations

Contract Composition

Emerson Contract Templates The Emerson template: Fair Comprehensive Protects Emerson Objective in Contact Negotiation Supplier to have 1 – 3 items to negotiate Emerson not want to rewrite entire contract Costly and Time Consuming

Master Supply Agreement Overview Terms & Conditions (Exhibit B) MSA Standard Clauses MSA Optional Clauses Exhibit A: Division Supply Agreement Schedule 1: Products and Pricing Standard Clauses Optional Clauses

Acceptance of the Agreement (#1) (Clause number within Exhibit B) The MSA / DSA terms will supersede any prior agreement If any clause in the contract is deemed unenforceable, the rest of the contract is still valid Agreement is MSA/DSA and POs referencing this order excluding the T&Cs automatically attached to a PO Terms and Conditions

Delivery / Inspection / Rejection (#2) Seller assumes the risk of an on-time delivery and all risks for the products until delivery is complete Seller is responsible to deliver within the terms of EMR2006 Buyer has right to inspect and test the goods before and after delivery Seller may offer to replace defective products, but Buyer must approve those replacements Terms and Conditions

Taxes (#3) Payment Terms (#4) Taxes: Buyer will not be held liable for taxes imposed on products Payment is due on the 5th day of the third month after the later of delivery or invoice This gives Emerson about net 82 days for payment Terms and Conditions

Warranty (#5) A warranty from the Seller guarantees the products' integrity and performance. If the products are deficient, the Seller is liable under the warranty to replace the products or provide a refund. 2-year warranty of product's design, material, workmanship and title from the date of delivery. If replacement: 2-year warranty is measured from replacement delivery date Terms and Conditions

Inspection (#6) & Compliance with Applicable Law (#7) Terms and Conditions

Intellectual Property & Proprietary Information (#8) Terms and Conditions

Indemnity (#9) Contractual Indemnity – Emerson has right to reimbursement if Emerson pays damages for something Seller caused. In this case, the Seller agrees to compensate Buyer from all losses resulting from breach of warranty, violation of a law or regulation or in connection with the product Examples: contract, tort/products liability, infringement/patent issues, misappropriation/business secrets Except in situations in which the Buyer is completely responsible (such as Buyer's negligence). Terms and Conditions

Insurance (#10) Seller agrees to carry product liability and general liability insurance of at least $5M; Insurance policy will provide 30 days notice of cancellation and name Buyer as an insured. Upon request, Seller will provide Buyer will certification of insurance. Failure to comply allows Buyer to immediately cancel contract. What about when entire business is <$5M? Determine reasonable amount (twice contract value?) Terms and Conditions

Other Clauses (# 11 – 13) Force Majeure (#11) Force Majeure is a contract clause that releases both parties from liability in the case of an extraordinary circumstance that is beyond the control of either party (including war, riot or labor strike). Force Majeure covers "Acts of God," which are natural disasters including flooding, earthquakes, volcanoes, etc. Applies when a situation arises that prevents one party from fulfilling its obligations under the contract. Cancellation, Termination & Suspension (#12) Allows each party an "out;" also provides the other side recourse if cancellation, termination or suspension impacts the party negatively. Supply Protection (#13) Places substantial economic risk of a labor and production shortage on the Seller. If the only substitute products are more expensive for the Buyer to procure, the Seller will pay the difference between the more expensive replacement products and the contract price. Terms and Conditions

Availability of Parts (#14) This clause ensures that the Buyer is able to maintain the products it purchases from the seller. In the case that the Seller is unable to provide the repair parts, the contract requires that the Seller share information necessary to maintain the products (even if the technical information is protected by intellectual property rights or a license) Terms and Conditions

Other Clauses Third Party Beneficiaries (#15) Considers third-party beneficiaries to be part of the "Buyer" designation and allows them rights under the contract; applies the terms and conditions of the contract to all subsequent Division Supply Agreements Electronic Data Interchange (#16) Electronic Data Interchange transfers data between two companies electronically. In this context, it most likely refers to electronic bills of lading, purchase orders, shipping manifests, etc. Survival (#17) Protects the Buyer's legal interests and supports the maintenance of products already purchased after the business relationship terminates. For example, if a lawsuit arises from faulty operation of a product the Seller has produced for the Buyer, the Seller is still liable for damages resulting even if the Buyer and Seller are not still contracting for that product. Terms and Conditions

Proprietary Information (#18) Terms and Conditions

Other Information Sharing Emerson has the right to access the Seller’s financial information if it is concerned about Seller’s financial stability (#19) Seller must provide Electronic Data interchange at Emerson’s request (#15) Seller must provide Emerson with any parametric information requested (product parts, materials, weights, certificates of origin, etc.) (#20) This also includes ECCN and HN numbers Terms and Conditions

Compliance – RoHS, WEEE, REACH (#21) RoHS (Restriction of Hazardous Substances) restricts the use of hazardous materials in the manufacturing of electrical equipment WEEE (Waste Electrical and Electronic Equipment) holds manufacturers responsible to dispose of electronics properly REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) controls the production and use of chemicals IPPC (International Plant Protection Convention) regulates the use of solid wood packaging material (SWP). Terms and Conditions

Compliance – RoHS, WEEE, REACH (#21) All regulations are implemented by the EU, although other countries (including China) have their own versions of these regulations. Emerson’s standard language covers all similar provisions, as well. Regardless of where products were produced, it is important that anyand all products Emerson purchases comply. Terms and Conditions

Changes (#22) Outlines the process for each side to make changes to the product or contract agreement. Buyer many make changes so long as it allows for adjustment in delivery time and price if necessary. Seller may make changes to the product only after Buyer's approval Terms and Conditions

Supply Chain Security – C-TPAT (#23) C-TPAT stands for Customs-Trade Partnership Against Terrorism Businesses participating in C-TPAT programs undergo supply-chain audits and are required to maintain a certain level of import/export screening. These businesses are subject to less stringent customs inspections when they import products. Emerson Contracts require that Sellers comply with C-TPAT standards regardless of their participation in the program. Terms and Conditions

Choice of Law; Venue; Misc. (#24) Choice of Law: The law that is applicable to the contract Choice of Venue: Location where any disputes will be reconciled (whether it is arbitration or litigation) For NA, the contract follows MO law, and will be litigated in St. Louis Terms and Conditions

Backdating an effective date is okay. This is the date that the contract relationship starts May have tax consequences Backdating the execution date is not okay. This is the date on the first line of the contract This is the date that the contract is signed It must be the correct date; otherwise it is fraud Relevant Dates Effective Start Date – the date that the contract is deemed to begin Effective End Date – the date that the contract is deemed to end; marks the end of the business relationship under the contract Execution Date – the date that the contract is signed or executed MSA : Standard

Scope References Terms and Conditions (Ts & Cs) Indicates that the Ts & Cs are applicable to future DSAs Defines the Seller’s obligations Identifies the Forecasted Purchase Volume (% of business requirements) Allows for Emerson to purchase from other suppliers (non-exclusive agreement) MSA : Standard

Transport – EMR 2006 EMR2006 sets forth Emerson logistic terms Places risk of loss and damage on Seller Seller is responsible for costs of delivery, insurance of goods during transport and export licenses/documents Requires Seller to use Emerson preferred carried ALT EMR2006 when have consignment or VMI Any changes to EMR2006 should be discussed with Legal & Accounting Inventory advantage MSA : Standard

Volume Incentive Rewards Emerson for high purchase quantities Rewards Seller for efficiencies created in the manufacturing process Based on the total dollar-based volume of products purchased, Seller will rebate Emerson based on an agreed-upon schedule MSA : Optional

Authorized Emerson Suppliers The MSA allows independent buyers who ultimately sell to Emerson (Authorized Emerson Suppliers)purchase from the Seller at the same prices and/or terms that the Seller provides to Emerson Each DSA lists Authorized Emerson Suppliers Increases Emerson’s volume incentive calculations Protects Emerson from rising input costs Assures Emerson of quality of component parts MSA : Optional

Price Reduction Seller will provide Emerson with an annual price reduction on the anniversary of either the MSA or DSA Rewards Emerson for loyalty to Seller MSA : Optional

Cost Reductions Implements a plan for Seller find efficiencies and reduce costs If Seller fails to meet cost reductions, must pay Emerson a penalty If Seller meets cost reduction goals, Seller may retain cost savings up to a certain percentage of cost reductions Any savings above the percentage value is to be shared between Seller and Emerson MSA : Optional

Tooling Tooling clause here identifies that tooling will be a part of this contract Generic clause The DSA is where the tooling is truly defined MSA : Optional

Price and Schedule 1 Sets a single price for all division purchases Schedule 1 is located in the DSA and includes: Product Specifications including Raw Material portion Price Forecasted Purchase Volume (EAU) DSA : Standard

Tooling The tooling clause defines Seller’s rights and obligations with respect to the tooling data and equipment: Seller assumes liability for tooling while it is in Seller’s possession Seller is responsible for expense of maintaining the tooling Seller will indemnify Emerson for any liability resulting from use of tooling equipment Emerson maintains ownership of equipment and data DSA : Optional

Currency To include a Currency Clause in an MSA: Contract must be worth > $2M Must include a preferred supplier or manufacturer Must contract for procurement of a corporate managed commodity Currency Clause must be approved by Team Leader To include a Currency Clause in an SDSA: Must be approved by VP of procurement or VP of supply chain Must be approved by Procurement Business Leader DSA : Standard

Currency When is currency allowed? In a transaction between companies in different countries, the exchange rate matters The price set forth in the MSA/DSA could represent a different value in “real dollars” In other words, the economic value of the price agreed upon might change with the exchange rate Currency Adjustments allow Emerson to protect itself against changes in exchange rates between different currencies. DSA : Optional

The adjustment protects the Seller from a diminishing profit margin when raw materials prices increase The adjustment benefits Emerson when raw materials prices drop Raw Materials Adjustment DSA : Optional

For example: The price of steel decreased from $750 to $500 in the last quarter (a change of 33.3%) ($500 - $750)/$500 = - 33.3% The total product price is $100, and $20 of the product price is attributable to steel $20 of the product price would be adjusted down by 33.3%: $20 * .333 = $6.67 reduction. $80 (the non-raw material portion of product price) would remain the same The total price after the Raw Materials adjustment would be ($20 - $6.67) + $80 = $93.33 Raw Materials Adjustment DSA : Optional

Inventory Inventory is critical to every division The contract can be a strategic inventory tool Consignment and Buffer Inventory are part of the base template Vendor Managed Inventory (VMI) and kan-ban are not Can be added as appropriate DSA : Optional

Consignment puts the product in an Emerson facility while it is still owned by the Seller. Emerson has possession, Seller has legal ownership Emerson takes title when it the product for use Product must be nonspecific to Emerson (not customized for use only by Emerson) Consignment Inventory DSA : Optional

Buffer Inventory Buffer Inventory is an amount of the supply product that the Seller keeps for use in supplying Emerson in case production slows or stops Seller has possession and ownership Buffer can be determined based on division past history or forecasts DSA : Optional

Template Differences Europe Template Substantial difference from NA template EU Community Competition Law Cannot purchase more than 80% of supply from 1 Supplier Contract cannot continue for > 5 Years Choice of Law / Choice of Forum Terms and Conditions Vary China Template Very Similar to NA template Tooling Provision Specific to China Performance of Security Form Choice of Law / Choice of Venue

Emerson Contract Management (ECM) This training was focused solely on the template. ECM or Emptoris (synonyms) is the software that allows Emerson to house all of the contracts in a central location ECM is a tool to help author the contract, provide the workflow and create a repository Still the responsibility of the contract author to negotiate the contract

Questions?

Back Up

Vendor Managed Inventory requires the Seller to maintain control over the inventory and manage the amount kept in inventory The supply is located at the Seller’s warehouse or a third-party vendor Emerson will provide the Seller with information about its needs and the Seller is responsible to maintain that level of the needed product Emerson is generally responsible to pick-up the product Vendor Managed Inventory DSA : Optional

TL/LTL TL/LTL TL/LTL TL/LTL EMR2006 Guideline Scenario 1: Emerson’s Carrier Handles Transportation from Suppliers Dock EMR Specified Shipping Location Supplier’s Factory or WH Transportation X-Dock Consolidation Trucking Final Destination Brokerage Divisions Carson X-Dock Memphis X-Dock Ohio X-Dock Customer All Logistics/Transportation Cost Bourne by Emerson from Suppliers Dock (4) Title Transfer (1) Export Cleared (2) Title/Ownership of Product and (3) Risk of Loss/Damage Supplier’s Responsibility Emerson’s Responsibility Seller shall make the Products available for export fully cleared from customs and shall load material into Emerson’s nominated truck/container at Suppliers Dock

Template Training