ISQA 510IP, Law, & Negotiations

Lecture 5

Agenda- Overview of Nike / Converse? Qs?- Final Paper Qs?The Law:- UCC & CISG- China & IP- Questions on Gechlik articleNegotiations- Game

The Law & IP

A contract can be any of the below…

• An exchange in writing such as a purchase order and the associated acknowledgement

• Oral promise• Combination of oral promises and writings• Formal signed agreement in writing• Promise by one party and performance by

another• NDA – Non disclosure agreements• LOI/MOU – Letter of Intent/Memorandum of

Understanding

Essential Contracting Principles

• Uniform Commercial Code (UCC) :– is not a code - state legislatures enact a version– is not uniform - nominal variations by state– creates substantial implied rights

• warranties• damages

– applies to purchase/sale of “goods”– N/A to services contracts– Contractual and legal rights may be waived if not

enforced or reserved

UCC is for domestic contracting, what about Global contracting…UN Convention on Contracts for International Sale of Goods

(CISG)Similar Objectives to UCCSimilar to UCC in Function

5 Significant DifferencesAcceptance of Offer: Mirror image or no contractContract Price: No Contract without firm priceRevocation of Offer: May be revoked at any time prior to

acceptanceFormation of Contract: At time of Receipt of AcceptanceOral Contracts: Valid and Enforceable

CISG may be Preferable to another country’s laws

When Do They Apply?UCC

Automatic application if “sale of goods” when U.S. law applies (any state) except Louisiana.

CISG

Sale of goods between parties in “contracting states.”

If only one party is in a contracting jurisdiction, CISG will not apply, unless both contracting parties agree.

Contracting Countries

Argentina, Australia, Austria, Belarus, Belgium, Bosnia, Herzegovina, Bulgaria, Burundi, Canada, Chile, China, Kirghizstan, Croatia, Cuba, The Czech Republic, Denmark, Ecuador, Egypt, Switzerland, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Iraq, Italy, Yugoslavia, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Norway, New Zealand, Holland, Peru, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Syria, Sweden, USA, Ukraine, Uganda, Uruguay, Uzbekistan, Venezuela, Zambia

Is the CISG “Law”?

• Only if you agree to it! Parties can opt out of these provisions through contractual language.

– Clearly specify an alternate choice of law to avoid CISG.

– Both parties must agree to the choice of law.

Intellectual Property

Three types of IP1.Patents2.Copyrights3.Trade secrets

IP types- Patent: Agreement between the

Government and inventor- First to file vs. first to invent- Only US, Canada, & Philippines- Must be filed in the country where

protection is expected- Copyright: protects innovators of music,

writing, software, logos, etc- Trade Secret: confidential information,

protected by NDA

TRIPS – Trade Related Aspects of IP Rights

- Part of the WTO requirements, China has observed since entering WTO

- Scope – Covers Patent, trademark, copyrights

- Remedies include – injunction to stop distribution & compensation to infringed- If unclear it is limited to $500K RMB

- Evidence is required on ownership of IP- Can be on litigant or infringed party

Gechlik Questions

Is the process of patent enforcement in China sufficient?

Does the existence of the PRB help of hinder IP protection in your opinion?

How does Chinese culture affect rulings by the PRB?

What is the losing rate and is it a good metric for IP protection or review in China?

Negotiations

- Corey (1978) considers prices to be based on three models:

1. Cost-based pricing: The supplier’s offering price is directly derived from his cost price.

2. Market-based pricing: The price of the product is determined on the market and is generated by market circumstances (demand, supply, stock positions, economic factors etc.)

3. Competitive bidding: The price is influenced by market factors as well as cost factors. This situation is most common.

How is the purchase price determined?

When It Comes to Negotiations, Every Technique Counts

Discount payment term

s

Use of low cost

geos

Optimizing Exchange Rate

Cost benchmarking

Negotiation

frequency

Rebates

Should-cost modeling

Inte

rnet N

egotiatio

n

Effectiv

ely date

Pass thru

pric

ing*

Supplier C

hain C

onsolidatio

n

Most Favore

d Custo

mer P

ricin

g

Design for cost

Meets C

omp P

ricin

g*

Not to E

xceed Pric

ing (N

TE)

Negotition Methodologies

Methods What is it? Benefit

3.Negotiation Frequency

The interval of price re-negotiations, determined by assessing factors, i.e. market conditions, internal customer, cost requirements, # of suppliers…

Systemically conduct frequent i.e. quarterly pricing negotiations proved to deliver better cost reduction results vs. those negotiate less

1.Should-cost

modeling

An analytical technique to estimate suppliers’ cost of goods/services, which is to use in negotiations and with internal customers / stakeholders

Use as a basis in driving cost reduction at pricing negotiation & managing cost to achieve cost saving

2.Cost Benchmarking

A process that systematically gather data on other companies’ cost & strategies via surveys, &/or telecons to identify relative position & opportunities for improvement

To identify relative cost position and industry best practices showing the most potential to save $, use them to achieve BIC pricing and practice

4.Supplier Chain

Consolidation

A technique using contracting language requires that supplier "not to exceed" certain price for the time period & make a commitment to decrease its pricing by % over time

Reduce a company’s overall supplier chain management spends by “5%-15% or more” over time & help to focus on the areas of greatest opp.*

(*McKinsey & Company).

5.Not to Exceed

Pricing (NTE)

A process to reduce total # of suppliers thru. qualifying & contracting w. integrated/global strategic suppliers to consolidate supply chain

Ensure we will not pay more than the NTE, in the meantime, neg. frequently for lower prices to get additional cost saving (w. cost curve in place)

Negotition Methodologies

Methods What it is? Benefit

6.Optimizing Exchange

Rate

A techniques that negotiate cost reductions &/or avoiding price increases as exchange rate fluctuations

As currency devaluating renegotiation may realize additional cost savings due to new exchange rate

8.Discount payment

terms

A negotiated, documented discount term on the purchase price of a product/service, in exchange for early payment of the invoice

Standard discount term is 2%, 10, net 45. It could result significant savings that impact to Profit & Lose, and Gross Margin if executed properly

9.Use of low cost geos

Sourcing products/services from/in low cost geo to maximize cost advantage while minimizing risk in availability/quality.

Focusing on material, labor, burden or operation cost drive lower cost on products/services than those of high cost geo w. fair availability/quality.

10.Internet Negotiation

A online tool/sys. - suppliers. are invited to bid online interactively during a scheduled time period - All bids/data are anonymous, remain confidential & secure

Streamline cost reduction negotiation and award business based on lowest total cost analysis. Eliminate human factors, fax/paper/email…

7.Meets Comp Pricing

A pricing model - a supplier agrees contractually to reduce its price to match any valid alt. price proposal from other supplier for “like Items”.

Keep lower and competitive cost* It is intended for only “Selective Application” when the proper requirements are met, not a 100 % applicable.

Negotiation Methodologies

Methods What is it? Benefit

12.Pass Thru Pricing

An approach that Component Vendor agrees to provide us “Contract Pricing” to CEM, which address price delta between ours & CEMs’

Ensure lower and/or competitive pricing.* It is intended for only “Selective Application” when the proper requirements are met.

13.Price Effectively

Achieve cost saving by applying new lower negotiated price right away or delaying to apply new higher price – only apply new higher price with PO placed after effective date

Contracting pricing effective date for products order placed or delivered – if new price is lower, apply for all material received at dock/WIP after the effective date

11. MFC Pricing

Contracting language specify MFC, for like parts w/ similar specifications, w/ 3rd party audit rights to ensure lowest price obtained for products/services

Supplier will reimburse for any price discrepancies w. all audit costs if discrepancies are discovered. Thus may ensure us getting lowest pricing.

14.Design for Cost

Change the product’s design or something. about the product to make it cheaper to manufacture, assemble, or use cheaper components as to reduce the costs

Less expensive designs w. the same form/function/quality earlier in design process w. lower-cost alternative parts or materials could save mls $

15.RebatesCost saving through “Rebate”

AKA “Price Masking”: Component Vendor negotiates & “rebates” the delta between negotiated price & MSRP Contract Price

Negotiation Game

A Change of plans………..

Three objectives of this course…….

- Take one operational strategy as contemplative action

- Accuracy of your data- Remove the mystery & Guanxi

Thanks & have fun in Beijing!