Arm’s-Length Relationship

CIOP is an end-to-end supply chain training and certification program designed and developed by supply chain practitioners and consultants. The syllabus was developed in consultation with the industry, which led to Inventory Management Body of Knowledge (IMBoK v3.0). Most of the class discussions you will hear cannot be found in any textbook rather these are all the original contribution from the developers of CIOP. For example, think about the types of inventories such as raw material, work-in-process and finished goods. Out of these three, WIP is the most difficult to sell in the market and that is one of the reasons, WIP should be controlled well. The company has a built-in capability and capacity to sell finished goods, which is their business. The second easy to sell are the raw materials as you know the suppliers, who may either buy-back or at least guide you. But in case of WIP, this is custom manufactured to suit your manufacturing processes and may not well fit any other organisation, hence you may have to sell it as a scrap.

The Arm's Length Relationship, which dates back to the ancient days of trade, is a critical concept in warehouse operations. This relationship exists between the supplier and the wholesaler and helps to ensure that the quality of products supplied by one party is equal to or higher than the other party. The arms-length relationship is also referred to as the supply chain management concept and is one of the most important concepts in warehouse operations. This concept is used to manage the relationships among the various parties involved in the supply chain including manufacturers, suppliers, distributors, resellers, brokers and agents.

In simple terms, arms-length relationship refers to the fact that parties take their time in deciding how to establish a long-term relationship with one another while still maintaining their independence and working together in the context of the overall supply chain. To illustrate this concept, imagine a manufacturer wants to sell its goods to a wholesaler that will keep the goods in stock and allow the manufacturer to make returns on capital invested. However, the wholesaler will only be open to selling the goods to retailers and not directly to end users such as end users who might be able to take advantage of lower prices or better deals. The manufacturer will have to determine how it can establish an arms-length relationship where it keeps its independence while still providing quality products to its customers. One way of achieving this is through effective control of inventory. Inventory management involves ensuring that enough and consistent supplies of raw materials and finished goods are available to ensure that the company is able to make profits from selling its products.

Another way of looking at the arms-length relationship is through the perspective of the distributor or retailer. The role of the distributor or retailer is to take up the role of the middleman between the manufacturer and the wholesaler or retailer. The role of this middleman is to make sure that the manufacturer's profit margin is kept intact so that a higher percentage of the profits from sales goes to the actual manufacturer. Therefore, whether one is looking at a manufacturer that is buying directly from another company, or a wholesaler or retailer buying directly from the manufacturer, it is important for these parties to have a fiduciary relationship with each other. This means that they must take responsibility for maintaining the integrity of the contract between the parties, which requires the manufacturer and the affiliate to protect each other's interests and not just their own interests.

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