A Rate Contract or a Rate Agreement (RC in short) is a

procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, Service (economics), services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agenc ...

cost reduction Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design i ...

strategy aimed at standardizing procurement prices for commonly procured, homogenous and price varying inputs.

Timing

A rate contract is usually attempted when a

global sourcing Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include ...

effort is not feasible, due to financial or operational constraints. A rate contract is also typically established in inputs where the number of suppliers is large (where it is not a

monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...

or an

oligopoly An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result from ...

Level

Rate contracts can be arranged at various levels by a large firm - in specific geography markets or at a national level or at a global level (if suppliers exist at differing scales) and in specific sub-categories, or in a range of sub-categories, or for a category, or for a related categories. The rate contract can also be established for a year or for multiple-years. The level of the rate contract agreed depends on: # The level of standardization of the input # The predictability of procurement spend # The nature of the supplier market # The

pricing power In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...

of the procurer as against the supplier.

Process of setup

The process of setting up a rate contract in a category follows a set of standard steps:- # Procurement spend analysis: Identification of cumulative spend, identification of key suppliers and their share of business, identification of average price of procurement, spend growth projections #

Market analysis A market analysis studies the attractiveness and the dynamics of a special market within a special industry. It is part of the industry analysis and thus in turn of the global environmental analysis. Through all of these analyses the strengths, wea ...

: Study of the nature of the market, exhaustive identification of suppliers and their capabilities, study of supplier cost structures. One of the primary objectives of this step is the identification and introduction of new suppliers # ''Supplier Interactions'': Selection of a fit-list of suppliers, invitation to suppliers for discussions, supplier discussions and interactions, RFQ to selected suppliers # ''Receipt of Quotes'' from suppliers # ''Selection of a fit list'' of suppliers # Agreement on the points of the rate contract and ''finalization of the rate contract'' Post the setup of a rate contract, a definitive ''monitoring mechanism'' must be set up. Such a monitoring mechanism needs to be done centrally by the organization and involves - monitoring of offtake by supplier, monitoring of non-RC offtake and monitoring of supplies and periodic quality audits. Without the setup of a monitoring mechanism, much of the effectiveness and purpose for a setup might be lost.

Special Types

A ''frame agreement'' is a special type of rate agreement entered with a set of suppliers, with a specific subset (may be just one) chosen as preferred. Frame agreements possess similar clauses as standard rate agreements with a few additional (optional) points such as * decreasing prices over time *

quality control Quality control (QC) is a process by which entities review the quality of all factors involved in production. ISO 9000 defines quality control as "a part of quality management focused on fulfilling quality requirements". This approach places ...

obligations for the supplier * minimum or maximum offtakes during the validity period *

provision Provision(s) may refer to: * Provision (accounting), a term for liability in accounting * Provision (contracting), a term for a procurement condition * ''Provision'' (album), an album by Scritti Politti * A term for the distribution, storing and/ ...

s for vendor-managed inventory The

UNHCR The United Nations High Commissioner for Refugees (UNHCR) is a United Nations agency mandated to aid and protect refugees, forcibly displaced communities, and stateless people, and to assist in their voluntary repatriation, local integrati ...

procures a large percentage of its requirements under frame agreements.

References

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Timing

Level

Process of setup

Special Types

References

See also