4 Simple Tips for Better Supply Agreements

03 September 2014 Manufacturing Industry Advisor Blog

Supply agreements serve as the lifeblood of many manufacturing companies. These agreements outline the terms and conditions controlling the supply of goods and services between various parties. Without this framework, many businesses could not meet the pressing demands of the modern-day marketplace.

With so much riding on these agreements, savvy business professionals must pay particular attention to agreement terms. The negotiation of supply agreement terms and conditions should involve the entire business team, not just the attorneys. Failure to critically think through options and deal terms often leads to lost profits and liability concerns over the life of a supply agreement. While by no means an exhaustive list, these tips below will help your business kick-start the supply agreement planning process.

Tip 1: Include an Exit Plan

At the onset of any relationship, optimism for the future runs high. Thinking about the end of any relationship can be unsettling. No one desires to dampen enthusiasm with thoughts of possible litigation and broken promises. Unfortunately, a healthy discussion of how the business relationship will end can save time, effort, and money.

All parties involved in the supply agreement negotiation need to do more than rubber stamp a standard termination provision. Questions, like the following, should be explored in depth:

  • How will termination affect our ability to deliver goods and services to our customers?
  • Do we have contingency plans in the event termination is unexpected?
  • Will we want this agreement to renew or terminate automatically?
  • What will be acceptable reasons for termination for cause or without cause?
  • Who will cover costs of unexpected termination detrimental to our business?

Though not comprehensive or applicable in all circumstances, these considerations should facilitate important discussions about how the relationship will end.

Tip 2: Consider Timing

As Murphy’s Law dictates, “How long a minute is, depends on which side of the bathroom door you’re on.” When negotiating supply agreements, expediency often depends on the business environment your company faces. External pressures dictate how fast you need that next shipment or how much that unexpected delay will push production schedules. You must take time to consult the proper business professionals in your organization regarding timing requirements. It may be necessary to enact liquidated damages provisions or other penalties as needed for delays or non-performance.

Tip 3: Keep Terms Confidential

Favorable pricing can often entice parties into deals. Some companies use nuanced pricing modules and/or forecasting to tailor pricing to particular customers. Regardless of the pricing structure, keeping this information confidential proves important. Release of this information may lead to customers comparing price terms, damaged customer relationships, or competitors gaining an edge. Engaging in non-disclosure or confidentiality agreements before sending any pricing terms or other sensitive information helps to avoid ungainly situations.

Tip 4: Evaluate Exclusivity

On one hand, exclusivity provisions can foster loyalty among customers, help guarantee adequate supply, enable pricing discounts, and reduce administrative and contracting costs. Some argue, on the other hand, that exclusivity provisions leave parties with little recourse in the event the relationship sours. Other detractors note the potential antitrust risks associated with exclusivity. Other factors, such as applicable geographic territories, may also affect the determination. A careful analysis of your supplier-buyer relationship should guide decisions regarding the proper treatment of exclusivity provisions in your supply agreements.

If your team collaborates to address these and other issues, your supply agreement should reflect your business’ expectations and promote long-term success. Happy negotiating!

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