AFTER CONSIGNMENT EFFECTIVE DATE. After the Consignment Effective Date and prior to such time as the Parties have implemented the Central Inventory Management Program (defined below), replenishment orders for the Rx Products will continue to be initiated by the Stores, consistent with the procedures described in Section 5(a) and subject to the review of Cardinal Health. It is understood and agreed between the Parties that the inventory of Rx Products held at the Stores will be managed at a level designed to achieve an average 11 inventory "turns" determined in accordance with generally accepted accounting principles (the "Inventory Turns Target") during each of the first three contract years of this Agreement. For purpose of this Agreement, inventory turns will be calculated on an aggregate basis each contract year based upon the average daily consigned inventory during such year, compared against sales of consigned inventory during the same period. If for any of the first three contract years, the actual inventory turns achieved is less than the Inventory Turns Target, then Kmart will pay Cardinal Health a service charge of 10% on such excess inventory within 5 business days of Cardinal Health's invoice for same. If for any of the first three contract years, the actual inventory turns achieved is greater than the Inventory Turns Target, then Cardinal Health will pay Kmart an inventory reduction bonus of 10% on such reduction in inventory within 5 business days of Kmart's invoice for same. On or before the third anniversary of the Commencement Date, the Parties will mutually implement a central inventory management program (the "Central Inventory Management Program") pursuant to which Cardinal Health will assume responsibility for managing the ordering process and the consigned pharmacy inventories for the Stores. Once the Central Inventory Management Program has been implemented the Inventory Turns Target will be discontinued, and no further adjustments (other than a pro-rata adjustment through the date of such implementation) will be made by or to either Kmart or Cardinal Health. If the Central Inventory Management Program is not implemented by the third anniversary of the Commencement Date, then the Inventory Turns Target in the fourth and fifth contract years will be 12 (and the related service charge and inventory reduction bonus calculations will continue as described above). All Non Rx Products will continue to be ordered and delivered as set forth in Section 5(a), above, both befor...
AFTER CONSIGNMENT EFFECTIVE DATE. From and after the Consignment Effective Date, the Rx Products will be paid for by Kmart in good and usable funds on the second banking day following the sale or dispensing of Rx Products by the Stores based on the dispensing data received at Kmart's Headquarters from the Stores (such second banking day, the "Consigned Merchandise Prompt Payment Date" and, together with the Non Consigned Merchandise Prompt Payment Date, the "Prompt Payment Date"). In order to facilitate proper accounting and record-keeping, the Parties will establish procedures to document the product movement at the time of delivery. Physical inventories will be conducted by Kmart at Kmart's expense, with the participation of Cardinal Health and its representatives, as follows: (i) as of October 31, 1996, with respect to each of the Sample Stores; (ii) as of each July 31 during the term of the Agreement, with respect to all Stores; and (iii) as of conversion to auto replenishment, with respect to each Store implementing such conversion. Kmart will conduct cycle counts on a limited number of items between physical inventories to confirm the integrity of the system, at such times and frequency as may be reasonably approved by the Parties. If consigned product is damaged or lost by casualty or shrinkage (due to theft or other unexplained loss), then Kmart will treat such product as having been sold or dispensed and the Parties will include the amount due to Cardinal Health for such product in calculating any net underpayment or overpayment below. Promptly following the end of each contract quarter, the Parties will calculate a reconciliation of the ending consigned inventory. This reconciliation will be determined as a function of beginning consigned inventory, plus net consigned product delivered to the Stores during the reconciliation period, less payments made by Kmart to Cardinal Health during the reconciliation period, and subject to an inflation factor to reflect the agreement of the Parties that Cardinal is entitled to all price inflation on the consigned inventory. For purposes of this calculation, the inflation factor will be calculated comparing the price at the beginning of the period against the price at the end of the period and applying the difference against the dispensing volume per item. This weighted average will be applied against the computed balance of consigned inventory as of the end of the reconciliation period. If a quarterly reconciliation reflects a shortage or ove...
