Publications

Non-Cancelable, Non-Returnable (NCNR) Product

An Industry Position Paper and Guideline
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.

Arrow Electronics, Inc.	Avaltek, Inc.	Avnet, Inc.
Bourns, Inc.	CDM Electronics, Inc.	CAPSCO
Carlton-Bates Company	Murata Electronics N.A., Inc.	Pioneer-Standard Electronics, Inc.
Powell Electronics, Inc.	Projections Unlimited, Inc.	RS Electronics
Sager Electronics	Texas Instruments	TTI, Inc.
Tyco Electronics	Xtal Technologies

Why is it important to evaluate the use of NCNR practices in our industry?

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:

Manufacturer

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

Distributor

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.

When should a product be assigned an NCNR status code?

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.

Recommended Guidelines for NCNR Products

Who	Category	Guideline
Manufacturer	Activity Codes	Assign activity codes for all products in the cost and resale schedule, including those designated NCNR. Utilize standard Costbook to identify all std. Non-NCRN items. Review annually, as a minimum Activity codes should consider both sales volume and number of customers who purchased product Identify/code items separately that support a limited customer base or are non-returnable in nature.
Manufacturer	Status Indictors	Assign status indicator to NCNR products If the intent is not to allow returns, but cancellations are allowable, consider creating an additional code, NR (non returnable) Support standardization and industry wide acceptance of codes
Manufacturer	Communication & Transmission	Transmit activity codes and status indicators with the standard cost and resale transmission EDI RosettaNet Email or printed cost and resale publications Establish a change notification system for activity code changes or products moving to an NCNR status. Provide any available market information that can help move the inventory (where can it be sold and if there are any known customers).
Manufacturer	Cancellations & Reschedules	Establish review process to accept order cancellations of NCNR product if product has not been manufactured or product specific materials have not been secured Establish review process to accept order quantity reduction of NCNR product if product has not been manufactured Establish a review process to accept order cancellations and backlog reductions for NCNR product in WIP, charge for costs incurred plus handling fee
Manufacturer	Inventory Returns	Issue returns authorizations for warranty and quality issues. Include all products purchased in the scrap allowance calculations
Manufacturer	Training	Provide appropriate internal personnel (i.e. sales, marketing, planning, customer service) with comprehensive and periodic training of use of activity codes and status indicators Conduct distributor training to ensure that authorized distributors understand product classification codes and business guidelines
Manufacturer	Policies & Procedures Manual	Generate and maintain a Policy and Procedure Manual easily accessible by authorized distributors Review Policy and Procedures Manual annually, as a minimum

Recommended Guidelines for NCNR Products

Who	Category	Guideline
Distributor	Activity Codes	Apply distributor calculated activity codes to manufacturer designated NCNR product
Distributor	Status Indicators	Create internal code (other than NCNR) for product not in manufacturer cost and resale Create internal code (other than NCNR) for internal reviews prior to purchase
Distributor	Status Indicators Communication	Display manufacturer generated NCNR status indicators for Sales, Product Marketing and Asset Management Disallow system generated orders for NCNR product over a threshold value (Example: $25K), require approval of Asset Management prior to order placement on manufacturers
Distributor	Quoting & Order entry	Implement a company policy on quoting and processing orders for NCNR product Train appropriate personnel on NCNR P&P Provide system generated script of policy for NCNR product for sales team Provide system generated, electronically transmitted NCNR form for customer signature Print NCNR policy on all P.O. confirmations, invoices and contracts Pass through manufacturer adders and handling fees to waive order entry minimums and multiples
Distributor	Cancellations & Reschedules	Accept order cancellations if product has not been manufactured (per manufacturer approval) Accept order quantity reduction if product has not been manufactured (per manufacturer approval) Accept order cancellations and backlog reductions for product in WIP, charge for costs incurred plus handling fee (per manufacturer approval)
Distributor	Inventory Returns	Issue returns for warranty and quality issues Apply scrap allowance to NCNR product

Customer:_______________ From:________________

Attn:____________________ Date:________________

P.O. Number:______________

Non-Cancelable / Non-Returnable Product Agreement

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:

Has been shipped to you
Is being held in inventory for you
Has been ordered from and manufactured by our supplier
Is work-in-process or pre-built by our supplier
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.

Manufacturer	Manufacturer Part No.	Customer Part No.	Quantity	Unit Price	Schedule

_____________________ ____________________

Distributor Representative Customer Representative

_____________________ ____________________

Date Date

Customer:_______________ From:________________

Attn:____________________ Date:________________

P.O. Number:______________

Non-Cancelable - Non-Returnable Product Agreement

Additional Product List

Manufacturer	Manufacturer Part No.	Customer Part No.	Quantity	Unit Price