Today I decided to include a sample Kan Ban contract that specifies the liabilities for both a buyer and supplier as they pertain to the finished inventory, semi-finished inventory and raw material inventory within the agreement. These contractual agreements work when both parties clearly define these aforementioned liabilities and are willing to negotiate in good faith. However, it’s essential that these agreements are signed by both parties, as the amount of inventory needed to make these contracts work is quite substantial. Use properly, the Kan Ban agreement can help reduce the buyer’s inventory holding costs, while providing the supplier with consistent manufacturing volumes.
The Difference Between a Kan Ban Contract and a Blanket Order
This sample Kan Ban agreement is somewhat similar to the blanket order outlined in the post Sample Blanket Order Agreement for B2B Sales: Identifying Liabilities. A blanket order is typically used to manage the cyclical and seasonal demand patterns of customers who can commit to quarterly and yearly volumes, but can’t guarantee which month those volumes will be needed. When thinking of such an agreement, think of how product is held and shipped upon a customer release. Once that release is made, the supplier then replenishes the finished inventory from scratch.
A Kan Ban agreement is different and this difference must be clearly understood. Kan Bans are more suited for linear, constant demand where suppliers must ship out parts consistently on a daily, weekly and monthly basis. To be successful means the supplier must have finished inventory waiting to ship, semi-finished inventory waiting to replenish the finished inventory, and finally, raw material & sub-assembly parts in transit waiting to replenish the semi-finished inventory.
The above outline is from the post: Contract Negotiation Strategies for Vendors Servicing OEMs. It outlines how the finished, semi-finished and raw material inventory should be managed. The following document is the sample agreement. This is one I've used for those manufacturing customers of mine that are responsible for the production and delivery of custom-made parts.
The agreement is structured around defining the quantities for each inventory category. In addition, it includes a clause that covers any revision requests or design changes made by the buyer and its impact on the supplier's inventory. You can remove this clause or keep it as you see fit. The bottom of this post has the sample Kan Ban contract in a word document.
KAN-BAN Terms & Conditions
Contractual Agreement Between COMPANY X & WIDGET INC.
Purchase Order Number: 996091
Term: 1 Year
Vendor: WIDGET INC.
Part Number: WIDGET INC. #4536789-22/Y
Product Description: MICROWAVE RADIO TRANSCEIVERS
Page: 1 of 2
This document outlines the contractual agreement reached between WIDGET INC. (herein after referred to as “Supplier”) and COMPANY "X" (herein after referred to as “Buyer”). This agreement outlines the conditions of an initial release quantity (also referred to as finished inventory quantity), semi-finished inventory and raw material inventory. The liabilities for both the Supplier and Buyer, under each aforementioned inventory category, are outlined within this agreement.
This agreement is to be effective from until . Should the volumes under this agreement not be completed within the allotted time-frame, the Buyer will be provided with an extension of the agreement by 3 months. This extension will be granted in order to complete the remaining delivery requirements set forth herein. The end of the 3 month extension will signal termination of the agreement, whereby all agreed upon parameters outlined in this document will be in full force.
The parameters of this Kan Ban contract, such as the Supplier’s & Buyer’s liability for finished inventory, semi-finished inventory and raw material inventory, are detailed in the terms and conditions below.
Terms & Conditions:
A. Pricing:
The prices in this agreement are considered fixed for the term of the agreement. However, should there be market condition changes that require either a decrease or increase in the quantity of the goods being sold, either party may request a review of prices based on those conditions. Should an incident with the latter case arise, the Supplier will require an extended lead time proportional to the increase, in order to adjust the release quantity accordingly. The pricing in this agreement has been prepared based on mutual negotiation for the purpose of defining in greater detail the Buyer’s purchase commitment.
The agreed upon pricing under this agreement is set forth as $425.00 for each unit shipped as part of the finished inventory quantity.
B. Quantity:
This agreement is for the production & consumption of: 750 Microwave Radio Transceivers # 4536789-22/Y
C. Initial Release Quantity: The initial release quantity under the agreement shall include the following quantities outlined below
- Twenty-Five (25) Microwave Radio Transceivers # 4536789-22/Y
- Lead time for the initial release quantity will be 5 weeks. Lead times for future release quantities will be available as stated under section “D” of this contractual agreement.
- Initial trigger quantity will not leave WIDGET INC. facility until the first release has been made by the Buyer.
D. Finished Inventory Quantity (Release Quantity): Throughout the duration of the contract, the Supplier agrees to manufacture finished inventory equal to:
- Twenty-Five (25) Microwave Radio Transceivers # 4536789-22/Y
- Lead Time: After the initial release quantity, all future releases will have a reduced lead time. Upon receipt of a release by the Buyer, the Supplier shall provide the finished inventory quantity of 25 units to the Buyer’s dock within 3-5 BUSINESS days. Deliver terms are Ex-Works Supplier warehouse, making all freight, duties and taxes the sole responsibility of the Buyer.
- Finished Inventory Replenishment: Upon a release made by the Buyer, the Supplier will be responsible for replenishing the finished inventory quantity. The lead time for replenishment will be 5 BUSINESS days for Twenty-Five (25) Microwave Radio Transceivers # 4536789-22/Y.
E. Semi-Finished Inventory: Supplier agrees to maintain, at all times, enough semi-finished inventory needed to replenish the finished inventory requirements of an additional 75 units of Microwave Radio Transceivers. A maximum of 3 releases (75 units) of finished inventory can be made within any two week period.
F. Raw Material Inventory: Supplier agrees to maintain, at all times, enough raw material inventory needed to replenish the semi-finished inventory.
G. Terms: Net Thirty (30) days
Procedure for the Contractual Agreement:
In the event of a revision due to a design change by the Buyer, the Buyer will advise the Supplier as soon as possible. Supplier will rework all inventory categories including the finished inventory quantity, the semi-finished inventory quantity and any work in process (defined as raw material inventory). This rework will be completed at a mutually agreed upon time span. If rework is found to be impossible, the Buyer will be responsible for the finished inventory, semi-finished inventory and any work in process.
Any such rework performed will be subject to additional costs borne by the Buyer. The Supplier maintains the right to increase the agreed upon price on future releases, if these revisions cause any additional manufacturing costs. The Supplier must provide explicit explanations of the increased costs, should they arise as a result of a revision request made by the Buyer.
Purchase Commitment & Termination:
In the event that the Buyer is required to terminate the agreement, the Supplier’s claim shall not exceed the total of finished inventory, semi-finished inventory and raw material inventory as defined below.
- Buyer’s Finished Inventory Liability of 25 units: $10,625.00 U.S.
- Buyer’s Semi-Finished Inventory Liability of 75 units: $11,156.25 U.S.
- Buyer’s Raw Material Inventory Liability: $5,000.00
- Total liability: $26,781.25 U.S.
H. Finished inventory liability: is defined as those units that are considered “finished goods”. This includes the release quantity of 25 units.
I. Semi-finished inventory liability: is defined as all sub-components & sub-assemblies needed to replenish the finished inventory or release quantity. The semi-finished inventory will be held in transit the Supplier’s manufacturing queue, and will not progress unless a release of 25 units (or three consecutive releases totaling 75) is made by the Buyer. This semi-finished inventory liability is needed to produce the agreed upon finished inventory of 25 units. It does not include the following labor.
- QC inspection
- Assembling
- Tuning
- Painting
- Labeling
- QC Final inspection
- Shipping
J. Raw material inventory: is defined as all material requirements needed to sustain the delivery requirements and lead time as agreed upon in this agreement.
The Supplier shall be entitled to terminate this agreement, or any extension thereof, provided a sixty (60) day notice is given to the Buyer. In such a case, the Supplier shall complete all semi-finished inventory during this period of sixty (60) days and shall continue to fulfill the last finished inventory releases for the Buyer during this sixty (60) day period. In addition, should the Supplier terminate the agreement, they waive any claim against the Buyer for the raw material inventory ($5,000.00). In the event that termination is initiated by the Buyer, the Buyer’s immediate liability will extend to the finished inventory of 25 units ($10,625.00), semi-finished inventory of 75 units ($11,156.25 U.S.) and raw material inventory of ($5,000.00). Upon cancellation by the Buyer, the Supplier will attempt to mitigate the Buyer’s liability for the raw material inventory on hand, and any sub-assemblies not exclusive to the Buyer’s unique requirements.
The parties have executed this agreement this date as set forth below:
WIDGET INC. COMPANY X
Approved by: ________________________ _________________________
Title: ________________________ _________________________
Signature: ________________________ __________________________
Date: ________________________ _________________________
When entering into a contractual agreement on supply, be sure to outline the liabilities for both parties. First, start by matching the type of agreement to your customer’s order patterns. Cyclical, seasonal and infrequent demand patterns typically call for blanket orders. Linear and constant demand patterns call for a more involved agreement. When looking to enter into a Kan Ban contract, be sure to clarify the liabilities as they pertain to finished inventory, semi-finished inventory and raw material inventory. In addition, make sure the quantities for each inventory category are clearly outlined in the agreement. You’ll need substantial volumes to make the Kan Ban agreement work and that means having enough sub-assembly parts and raw materials in various stages in manufacturing. Here is the sample Kan Ban Contract: Download Sample Kan Ban
If you want to read about the differences between a Kan Ban and Blanket Order agreement, then please read: Streamlining Supply Chains With Blanket Orders & Kanban Agreements
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