Supplier contracts, Incoterms, total cost and quality control

1Incoterms

Incoterms (rules of the International Chamber of Commerce, 2020 version) set, for a sale, the point at which the risks pass from the seller to the buyer and who pays which costs. They govern neither the transfer of ownership nor payment.

• EXW (Ex Works): the buyer takes on everything from the factory, including loading and export. Maximum risk for the buyer.
• FCA (Free Carrier): the seller hands over the goods, cleared for export, to the carrier designated by the buyer.
• FOB (Free On Board, sea): risks are transferred when the goods are on board the vessel at the port of loading.
• CFR / CIF (sea): the seller pays the freight to the port of destination (and minimum insurance for CIF), but the risk passes to the buyer as soon as the goods are loaded at the port of departure.
• CPT / CIP (all modes): equivalents of CFR/CIF for all modes; CIP requires extended insurance cover.
• DAP (Delivered At Place): the seller delivers to the agreed place, not cleared for import.
• DDP (Delivered Duty Paid): the seller takes on everything, including customs clearance and import duties. Often impossible or unsuitable when the organisation benefits from exemptions, because it is the seller who imports.

A common trap: under CIF, the seller pays the freight, but if the ship sinks, it is the buyer who bears the loss and claims from the insurer. Always check the level of cover.

2Comparing on total cost

Two offers with different Incoterms cannot be compared on the displayed price. Each offer is brought back to the same point (the landed cost at the warehouse), and for equipment the total cost of ownership (TCO) is calculated: purchase + transport + installation + energy + maintenance + spare parts + negative residual value.

Generator example over 5 years:

B, 50% more expensive to buy, costs 11,400 USD less over 5 years. Fuel for A: 4 × 8 × 300 × 5 × 1.20 = 57,600. The committee may select B if the announced criteria included total cost; otherwise, the next tender must include them.

3Key contractual clauses

A purchase order or a contract protects the organisation through a few essential clauses:

• Subject, quantities, specifications (in an annex), Incoterm and place of delivery.
• Delivery lead time and liquidated damages for late delivery: for example 0.5% of the value per day of delay, capped at 10%.
• Payment terms: on delivery and after compliant receipt; avoid advances, or cap them (20 to 30%) with a bank guarantee.
• Technical warranty (12 months for equipment) and a performance guarantee for large contracts (often 5 to 10%).
• Inspection and acceptance: right to inspect before shipment; rejection of non-compliant items at the supplier's expense.
• Ethical clauses: anti-corruption, sanctions, child labour, sexual exploitation and abuse, right of audit.
• Termination, force majeure and dispute resolution.

Penalty calculation. Contract of 60,000 USD, delivered 12 days late, penalty 0.5% per day, cap 10%. Penalty = 60,000 × 0.5% × 12 = 3,600 USD (6%, below the cap of 6,000 USD). With 25 days of delay: 7,500 USD calculated, reduced to the cap of 6,000 USD.

4Quality control

Quality control takes place at three points:

• Before shipment: inspection at the supplier's premises by the organisation or an inspection company, for large volumes, medicines and critical items.
• On receipt: counting, visual inspection, sampling according to a plan (for example 1 package in 20), checking of expiry dates and batches.
• In use: feedback from teams and beneficiaries (post-distribution monitoring).

Goods received note. It records the quantities received, missing, damaged and non-compliant. It is signed by the storekeeper and a witness, never by the requester alone. A receipt "with reservations" is noted on the carrier's delivery note, otherwise a claim becomes very difficult.

For medicines and health products, specific rules apply: prequalified suppliers (for example by WHO or recognised humanitarian procurement centres), good distribution practices, control of dates and storage conditions. Buying a medicine on an uncontrolled local market exposes you to the risk of falsified products.

5Evaluating and managing suppliers

Each major supplier is evaluated after each contract, on a simple grid:

• Lead time: share of deliveries on time and complete (OTIF, on time in full).
• Quality: non-compliance rate on receipt.
• Price: stability and competitiveness.
• Service: responsiveness, correct documents, handling of claims.
• Compliance: ethics, adherence to the contract.

OTIF example. 40 deliveries over the year: 34 on time, of which 31 complete; 6 late. OTIF = 31 / 40 = 77.5%. A target of 90% is not met: meeting with the supplier, improvement plan, and search for alternative suppliers.

Managing the relationship also means paying on time: an organisation that pays at 90 days loses the best local suppliers or pays a higher price.

6Local procurement and markets

Buying locally reduces lead times and supports the economy, but requires a market analysis:

• Can the market supply the quantities without driving up prices for the population?
• Is the quality consistent?
• Do suppliers have the financial capacity to accept payment on delivery?

Price effect example. A local market usually sells 50 t of beans per month. An organisation wants to buy 40 t at once. That is 80% of the monthly supply: high risk of price increases for households that receive no assistance. Options: spread the purchase over several months, combine local and regional procurement, or use cash transfers if the market can respond gradually.

Market analyses (for example MSMA-type tools or WFP price monitoring) help decide between in-kind assistance, local procurement and cash transfers.