NEDA

PUBLICATION

December 2002

A committee comprised of distributor and manufacturer members of the National Electronic Distributors Association (NEDA) was formed to develop an industry position paper and guideline for the handling of non-cancelable, non-returnable product (NCNR). Included as an attachment is a suggested Non-Cancelable / Non-Returnable Product Agreement.

The following companies participated in the preparation of this position paper.

Non-cancelable, non-returnable (NCNR) product refers to a product purchased under a written contract that specifies once the order is placed, the purchaser is not allowed to make any cancellations or reductions to the order, nor are they allowed to return product (except for warranty resulting from product defects). This product classification is passed along through the supply chain.

Manufacturers implement NCNR as a way to manage production starts, improve the utilization of manufacturing and test facilities, manage inventory, and restrict the return of non-standard product that may be unique to the customer. Some distributors utilize NCNR as a way to internally manage inventory and restrict the return of product from customers.

Manufacturers should have a process to identify and notify their authorized distributors of NCNR product at the time of quote, with the process applied consistently across all a manufacturer’s product/marketing departments and authorized distributors. This process should include those products that change classification over their lifetime. In return, distributors should have a method of recognizing manufacturer NCNR product and notifying their customers, at the time of quote, of the cancellation and return guidelines involved with NCNR products, and obtaining a signed NCNR agreement on receipt of purchase order.

The use of NCNR has been an industry practice for many years. However the discrepancies in the business practice regarding the use of NCNR became evident during the recent economic downturn. Currently, NCNR policies and practices are not consistent in the industry nor are they applied using the same level of discipline across the supply chain (i.e. distributors and manufacturers). In addition the term NCNR has become diluted with numerous meanings, causing confusion among manufacturers, distributors, and customers.

Manufacturers are not consistently communicating to their distributors those products that are categorized NCNR. In violation and inconsistent application of agreements, manufacturers and distributors are processing cancellations and accepting returns for NCNR product due to competitive threat, customer power, and lack of signed NCNR agreements from customers. Distributors are applying the NCNR code to product as a technique to review a part before it is purchased and for product that is not in a manufacturer’s price book. The dilemma that results from discrepancies in product categorization is mixed messages the customer receives from manufacturers and their authorized distributors. Thus, the misapplication of the term NCNR has diluted its meaning.

Benefits of labeling products NCNR include:

• Directs customers away from non-standard product and away from product the manufacturer is not interested in manufacturing

• Identifies inventory exposure, minimizing risks when used properly
• Forces accurate demand forecasts and eliminates duplicate ordering

Issues with current NCNR programs include:

• Manufacturers designate product NCNR without advance warning, making it difficult to enforce with OEMs and CMs

• Manufacturers do not timely or clearly communicate NCNR designated product
• Manufacturers use NCNR as a vehicle to ensure sales, without returns, regardless of activity code or customer usage
• Some manufacturers are not consistent in policy between distributors
• Some manufacturers designate the same part as NCNR to distributors but standard to direct customers.
• Distributors designate product NCNR to control inventory
• Distributors designate product NCNR when part types are deleted from or are not in a manufacturers cost schedule
• Distributors do not identify NCNR product on their systems
• Distributors are not consistent with their internal procedures for quoting NCNR product to customers
• Some customers are not signing NCNR product agreement forms

• Contract Manufacturers (CMs) are not maintaining communications with their end customers on NCNR devices and for potential re-designs on NCNR product.

Manufacturers and distributors can satisfy the customer’s requirements to procure all products from their selected approved vendor while addressing their production facility usage and inventory management concerns by implementing or re-evaluating several policies and processes:

• Do not mix activity codes (A, B, C etc) and status indicators (New Product, NCNR, etc). Establish a category for each with clearly identified business guidelines

• Assign activity codes to products, including NCNR products

• Communicate activity codes and status indicators (NCNR) to distributors on a scheduled basis (i.e. monthly, quarterly, etc.)
• Re-evaluate distributor return and scrap policy including timely notification, consistent information, and inclusion of NCNR product in the scrap calculation
• Amend cancellation policy for NCNR to apply to both distributors and direct purchase
• Ensure that devices that have NCNR status with distributors also have NCNR status with direct customers and CMs.
• Adhere to an industry-agreed-upon notification format when notifying distributors via electronic means of item status and price changes
• Require confirmation from the distributor that NCNR notification was received

• Designate manufacturer NCNR on internal inventory and sales systems
• Print on the packing list and invoice that the item is NCNR when shipping an NCNR item
• Create an internal code, other than NCNR, for parts that Asset Management wants to review prior to purchase and for product not in the manufacturer’s published cost and resale schedule
• Implement a policy for quoting product designated NCNR by making sure the quote includes clear identification of parts designated NCNR
• Enforce customer participation in NCNR acceptance policy
• Denote items that separately are considered as only non-refundable with the understanding these can be canceled per the manufacturer’s cancellation/reschedule window.

It is recommended that the NCNR status code be applied:

• to custom product designed specifically for one customer and/or their approved manufacturing service partners
• during the lifetime buy stage of product scheduled for withdrawal from the manufacturer portfolio.
• when two customers (excluding distributors) account for 80% of sales
• when one customer (excluding distributors) accounts for 70% of sales

Once an item becomes NCNR due to any of the above factors, that designation should remain in effect for at least 6 months.

We have received and thank you for your recent purchase order and ask that you agree to our policy regarding non-cancelable / non-returnable (NCNR) products to avoid misunderstandings. The below listed parts shall be considered as non-cancelable, non-returnable, and non-reschedulable. You assume full liability for any product that:

1. Has been shipped to you
2. Is being held in inventory for you
3. Has been ordered from and manufactured by our supplier
4. Is work-in-process or pre-built by our supplier
5. Parts that, in conjunction with the manufacturer, can’t be moved out to a newly requested date

Product may be returned in accordance with any applicable warranty. Any warranty that would ordinarily apply will not be affected by this agreement.

We will make every effort to accommodate changes in your delivery requirements, however once production has begun or product purchased, we may be unable to make changes. If changes can be made, you are responsible for any charges passed along from our supplier.

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Distributor Representative                       Customer Representative

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