- Vendor Managed Inventories (VMI) : We continue to trend towards relying on our key supplier base to assume more responsibilities with inventory. In doing so, if we have any financial penalty clauses in the agreement and do not use the inventory they are stocking for us, this is a financial obligation that does not show up on the balance sheet.
- Long-term Purchase Agreements: Similar to VMI, any agreements that include a financial obligation in the event of cancellation, established restocking charges or other provisions should be reported to your CFO or CCO as a means of advising where potential obligations could exist.
- Lease Agreements: In our day-to-day business we often are faced with the fundamental decision to purchase or lease. Our decisions are unique to our companies and to our internal requirements, and the decision to pursue lease agreements versus purchase will be based on a variety of factors. Keep in mind that any penalties or other financial obligation outlined in the agreement for early termination are financial obligations that cannot be seen in our standard financial statements but certainly could have a significant impact on our financials if we elect to end the agreement early. Again, it is imperative to keep our CFO and/or CCO fully aware of which agreements contain these obligations.
- Letters of Intent: These are common and are used in capital intense situations whereby we need to get in the production schedule for long lead time deliveries. Although this wouldn't seem to relate to SOX compliance, in fact, the same principle applies: If the letter of intent has a cancellation clause with financial penalty, then we need to ensure that we are keeping the CEO/CCO informed.
Where to Start?
About the author: Robert J. Engel has been in the supply chain profession for more than 35 years, beginning Shell Oil Company's staff development program for procurement and supply management professionals. Currently he is national director of client service for the Supply Chain Management practice at Resources Global Professional (www.resourcesglobal.com).