Legal document explanation for supplier charging

B

Brian Dowsett

#1
Hello folks

I saw this within a legal agreement offered to a potential supplier :

As per custom of the automotive industry XXXX explicitly accepts liability for damages that are calculated using statistical methods on the basis of a representative sample of defective products.

Is anyone familiar with this custom? Is this saying "We checked your product and statistically estimate that X percent of your total product population is defective, therefore we want X percent of our warranty bill (attributed to your product) paid by you???

Any legal bods out there?

Cheers

Brian
 
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Wes Bucey

Quite Involved in Discussions
#2
Hello folks

I saw this within a legal agreement offered to a potential supplier :

As per custom of the automotive industry XXXX explicitly accepts liability for damages that are calculated using statistical methods on the basis of a representative sample of defective products.

Is anyone familiar with this custom? Is this saying "We checked your product and statistically estimate that X percent of your total product population is defective, therefore we want X percent of our warranty bill (attributed to your product) paid by you???

Any legal bods out there?

Cheers

Brian
Contract law prevails. If the supplier is willing to take the contract and delivers faulty product, he deserves what he gets. The alternate is for supplier to pay up front for a 100% inspection to "prove" the statistical basis is wrong. Odds are, such a re-inspection will not alter the statistics and the supplier will be caught paying for BOTH the re-inspection and the warranty payment.

The viable solution is to refuse to do business with such a hard-nosed customer if you will have ANY chance of delivering nonconforming product to him.
 

Jim Wynne

Staff member
Admin
#3
Hello folks

I saw this within a legal agreement offered to a potential supplier :

As per custom of the automotive industry XXXX explicitly accepts liability for damages that are calculated using statistical methods on the basis of a representative sample of defective products.

Is anyone familiar with this custom? Is this saying "We checked your product and statistically estimate that X percent of your total product population is defective, therefore we want X percent of our warranty bill (attributed to your product) paid by you???

Any legal bods out there?

Cheers

Brian
This is not a good place to ask for legal advice. We can offer our own experience, but if there's ambiguous contract language, it's best sorted out by a lawyer qualified in commercial law. With that disclaimer out of the way, I'm not sure what the statement means. It seems that in order for it to make sense, the customer is saying, "When something bad happens that involves your parts, we'll count the number of defective parts and assign liability based on the proportion of the defective population that your percentage of supplied parts in general indicates." In other words, if the customer gets a total 10,000 parts from a number of different sources, and you've supplied 2,000 (20% of the total) of them, if they wind up with a pool of defectives your liability will be equal to 20% of the total amount of losses. This is yet another reason to perform some sort of lot control, or mark your parts such that they can be identified should they be mixed with parts from other suppliers. I could be wrong about any of this, though, so I reiterate the bit about having a lawyer look at it.
 
D

dna_leri

#4
As per custom of the automotive industry XXXX explicitly accepts liability for damages that are calculated using statistical methods on the basis of a representative sample of defective products.
I am not a legal eagle, but this is not unusual in the automotive industry, in particular for warranty claims. An OEM may analyse warranty returns from one market place only e.g. their home region/country only and then apply a multiplier to calculate estimated global liability based on this sample.

Yes, it's important to understand what you are getting yourself in for, get legal advise and possibly have liability insurance to cover it but good luck if you intend to negotiate with an automotive OEM on the validity of the statistical methods used.
 
M

M Greenaway

#5
I would reply to the customer stating that our processes have a capability that will yield xppm defective parts, and when you bought these parts you did so in the full knowledge of this process capability (I often tell purchasing people that they are purchasing process capability), it is with this known capability that we are able to provide this product at this cost which you accept.

We will therefore accept no consequential losses associated with this known ppm, if you require absolute assurances that no bad parts are passed on we can do this but the unit cost will be $X.

You do the math, do current losses based on the ppm outweight the unit cost increase for 100% defect free ?

(not to mention the fact that things will never be defect free).
 

Jim Wynne

Staff member
Admin
#6
I would reply to the customer stating that our processes have a capability that will yield xppm defective parts, and when you bought these parts you did so in the full knowledge of this process capability (I often tell purchasing people that they are purchasing process capability), it is with this known capability that we are able to provide this product at this cost which you accept.
The problem with this is that when x PPM is specified, it doesn't necessarily mean that the customer is agreeing to eat x number of defective products. It might mean that the process yield is expected to be x PPM, but defectives will still be returned, and the supplier is still responsible for them. In this sort of situation, the customer specifies a PPM level in order to assure the requisite flow of usable product, not to tell the customer that they will accept and pay for a specified level of defective product.

This is yet another reason that PPM is a bad way to count defectives; it might mean something totally different from what you think it means. As usual in these cases, there are two important words: contract review.
 
B

Brian Dowsett

#7
Many thanks for all your advice and opinions..

Now - to find a small syllable Lawyer ..........


Cheers

Brian
 
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