What is Annual Rate Contract (ARC) ?
What is an Annual Rate Contract (ARC)?
An annual Rate Contract (ARC) is a procurement strategy of enterprises/ business customers to reduce cost. ARC is an agreement or contract between sellers and buyers to provide items for a defined period, mostly a year. ARC is a great solution and benefits both sellers and buyers. ARC assures constant prices throughout the year and protects buyer from increasing prices and for Sellers, getting visibility of supply, with which they can plan the supply quantity committed in ARC and hence can assure better margin. ARC assures faster and simplified procurement for both buyer and seller. ARCs would fall in Class B purchases. As an organization, there should always be a push to convert all their Class C items( the unknowns/ unplanned purchases) to Class B ( the planned purchases) but this would not happen in a day, organization need to work backward from their data of consumption pattern and then decide
When should we opt for ARC?
ARC is a great strategy when the buyer is aware of its consumption pattern and can make a forecast of the buying pattern for the year. But, if the consumption pattern is not known, and is controlled by uncontrollable external factors, it is recommended not to go for ARCs as it impacts sellers as well. The buying pattern of buyers becomes the selling pattern of sellers which helps them plan their sourcing or utilizing manufacturing capacity, and if the ARC commitment is not followed, it impacts the complete value chain and impacts the seller most.
Who should opt for ARC?
Enterprises/ business customers who have visibility of consumption patterns with their past data to validate should surely go for ARCs. Items which does not have control over consumption should NOT be on ARCs. For unknow purchases ( Class C) its recommended not to opt for ARS as it impacts the seller most and it will either breach contract terms as quantities are defined in ARC. Its suggested to keep items out of ARC if consumption patterns are not know, and build data to know the consumption patter and then go for ARCs.
Why ARC's win-win situation of buyer and seller?
The complete supply chain from demand to supply depends on the buyer's ask. All demands are consolidated to end suppliers and then they plan to fulfill. In the most idealistic scenario, if a buyer gives the most accurate forecast of their buying patterns, the seller would plan their sourcing/ manufacturing accordingly which results in saving resources at cost hence the value comes which is first transferred to the seller and then to the buyer
How does 1VP help in this process?
1VP is focused on Class C and Class B items. With the usage of 1VP enterprise/business customers would know their buying patterns and costs ( big enterprise also have their software to manage these), but not focus on data analytics which should fall in ARC or not, our AI-backed platform recommends items which should have ARCs as the items are used and also assure seamless ordering mechanism to selected ARC vendor.
Note: Above article is written by 1VP team and does not represent any of the selling partners and buyers view and practices. The article is for educational purpose for users and sharing 1VP's contribution in solving it.
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