When your customer reneges on his order

Editor's note: This article is another in a series by Bill Tobin of WJT Assoc., in which he describes molder's relationships with customers.

All too often in the game of business we accept the purchase order, build the tooling, qualify production, ship the first two or three lots of material and find out the marketplace our customer told us about simply wasn't there. He says, "Oh well, that's what business is all about," and cancels all future orders. However, you are stuck with reserved capacity and no business, tooling that will sit idle, and profits that will not be realized. What's a molder to do? This isn't a hopeless case, even without a lawyer. While I cannot tell you how to fix the sins of the past, you can avoid a similar situation in the future.

Realize the Game

First of all, you are dealing with a professional buyer whose sole purpose in life is to supply a steady stream of parts required by production. He attends seminars on contract law and how to write purchase orders to his advantage. You, however, have a company to run and a lawyer you would rather not keep on your payroll. Net result: The game is rigged, and if you are not careful, you will be burned. So the first thing to do is write your contract carefully.

Look at volumes. If your pricing was based on 12 million parts per year, and you shipped only the first half million, there may still be hope, called the per year clause. This is a lot like an employment contract. When you hire someone on a weekly salary and he leaves, he is entitled only to the amount per week he is owed, not on the annual equivalent. In the legal profession, this concept is called the benefit of the deal. Take a look at your contract. If pricing is based on pieces per year, you may be in a negotiating position to get cash, or substitute business to give you the benefit of the deal.

When you write long-term contracts, write a Buy or Pay contract. This lays out the pricing based on a forecast. It says if the volumes negotiated fall short within a specified period of time, your client will pay cash for the balance at a discounted rate but not take delivery of any parts. This is the offset for the benefit of the deal. Buy or Pay contracts have two consequences. First, when the buyer realizes he may have to cut you a check and receive nothing in return, he will lower the forecast to a realistic number he is sure of achieving. Second, if you cash in the Pay part of the Buy or Pay clause, you get your profit without having to make anything.

Look at purchase order releases. A purchase order is a legal document. If you were released to produce a half million units, you should be paid for that half million whether the buyer wanted them shipped or not. Payment is legally required within a reasonable amount of time. If your client is using you as a warehouse, he must also assume the cost of storage and risk of spoilage.

When you don't have a purchase order, but your client shows you future requirements so that you can purchase resin and comply with his JIT program, you are entitled to be paid for that resin (or the round-trip freight and restocking charges if an arrangement is made to return the shipment to the resin supplier).

In your response to the RFQ, part of your written policy should be the price of canceling a project. It is common in the industry to give away engineering expertise, machine sampling time, resin, and assembly time to bring a project into a molder's plant. If all this debugging were done in the spirit of charity, every molder would be bankrupt.

We do this with the expectation of recovering these costs through the profits generated in production. If production does not materialize, the molder has a significant bill and no way to pay it. Your project cancellation clauses should include material returns, the cost of startups and debugging at consultant's rates (that is, $100/hour or higher), all machine costs, as well as compensation for loss of the benefit of the deal. Reference to cancellation charges should be part of the documentation you send with every shipment, invoice, letter of acknowledgment, or response to a request for quotation. A policy manual that includes this policy, your protocols for mold and part qualification, and the terms and conditions of how you do business should be sent to all your clients at least once a year.

Did the Company Renege?

Some large companies simply renege on the purchase order. This is done with the expectation that their molders are afraid they will never see any business again if they complain. Don't fall for this trap. You were lied to and cheated out of a benefit that was rightfully yours to expect. In marriages, after all, this is grounds to bring in the lawyers. If the contract you signed allowed them to do this legally, you were simply outplayed. If, however, the company just did this, you have several options. Keep in mind you have already sustained a financial loss and these folks have used you in the worst possible way. Even if the company is on the Fortune 500 list, you have nothing to lose by playing your own game.

Your Strategy

You have several options at this point. You can create linkage; if you have any other jobs for this customer or any other division/plant/subsidiary of this customer, stop all production until this matter is resolved. After consulting with your attorney, go to a judge and place a lien on all the tools for this client, stop production, and negotiate a settlement.

The beauty (and sometimes curse) of America is we have the right to sue anyone, for anything, at any time. As part of the suit, reassert your claim on all the tooling. If you wrote your paperwork properly, attorneys' fees are part of the invoice collection process, thus this suit is free to you. Realistically you probably will neither win the suit nor get into court. However, with the current JIT philosophy, you will probably shut down your customer's production lines and cause him potentially more damage than a settlement is worth. One predictable thing with attorneys is that they would sooner negotiate than go to trial. Rest assured that after a lawsuit, you will never do business with this company again. Then again, getting away from someone who cheated you is the kind of a loss you can probably handle.