While most manufacturers would aspire to a ‘lean manufacturing’ model, many are prevented from achieving it due to inadequate legal contracts. Nick Booth, head of Harrison Drury’s manufacturing and engineering team, looks at how having robust contracts in place allows for a more efficient business model.
Lean manufacturing is an approach based on finding efficiencies and removing wasteful steps that do not add value to the end product.
To find efficiencies, lean manufacturing adopts a customer focus. Obviously, customers want value, and they will only pay for something if it meets their needs. A customer will not be happy if they have to pay for defects or the extra cost of having a large inventory. This essentially boils down to cutting waste from the production process.
With this in mind, there are several types of provision which you could consider incorporating into your contracts to help ensure your business is as efficient as possible, these include:
Clear performance dates
One method to help cut waste is the concept of “just in time”. In order to minimise stock and resources, you only purchase materials and produce and distribute products as and when required. You also produce small, continuous batches of products to help production run smoothly and efficiently. Reducing batch size allows you to monitor quality and correct any defects as you go. In order to achieve this, you need to ensure that you can rely on your suppliers to deliver materials as and when you need them. By having clear performance dates in your contracts, this can help to ensure that materials are delivered on time which allows you to manufacture products as and when required.
A clause that allows recovery of legal costs
Many companies have problems relating to bad debts. One way of reducing your exposure to bad debts is to include a provision which allows you to recover your legal costs in the event the other party breaches a contract. A common issue with bad debts is if their value is under £10,000, they are usually allocated to the “small claims track” which generally doesn’t allow the winning party to recover the vast majority of their legal costs. However, a recent case highlights that it still may be possible to recover costs where the contract makes provision for it, even if a claim is allocated to the small claims track. Although the defendant may be able to challenge a contractual right to costs if they are unreasonably incurred or unreasonable in amount, having a clause to this effect could be a useful tool to discourage debtors from defaulting in the first place.
Clear terms relating to the quality requirements of the goods you are buying
Buying faulty or defective goods will only lead to more waste for your business. Incorporating a clause to this effect would set out the supplier’s obligations regarding the quality requirements of the goods and any applicable statutory and regulatory requirements they must comply with. This could also be combined with a clause outlining the remedies that are available if goods do not meet the specified requirements.
If you have any queries regarding this article, Nick Booth is the head of Harrison Drury’s specialist manufacturing and engineering team and can be contacted on 01772 258 321.