What is a Supplier Agreement
Often referred to as a supply agreement, vendor agreement, or seller agreement, the "supplier agreement" is the document that governs the relationship with each supplier and the services and/or goods you procure from that supplier. The supplier agreement contains the basic contact information, such as name address, phone and email address of both the supplier and you, the customer (as represented by your company). These basics will be covered in the introductory part of the supplier agreement, followed by a description of the goods or services being provided. The product description may range from a short, simple description to a long and detailed list. If the descriptions are long (such as when there are many different lots of products being provided at different times), or if they change too often to provide a detailed description (such as when perishable products are being provided), then the supplier agreement will usually identify the method by which the list will be updated. Sometimes this means identifying an electronic catalog. Sometimes it means describing how the price list will be determined at the time of the transaction.
The supplier agreement may also include some basics about your pricing, such as when it will be reviewed for increase or decrease. It is not uncommon for suppliers to "lock in" prices or to promise not to increase prices more than a set percentage for a certain period of time. Even after those times, prices may be subject to other limitations on increases.
The supplier agreement will generally describe any minimum ordering requirements, including minimum order amounts or minimum fees for services. Often, a supplier agreement will address delivery of the products or services, such as specifying shipping arrangements, packaging requirements, return requirements and so forth.
Suppliers sometimes have liability insurance prerequisites that must be covered within a supplier agreement. Depending on the goods or services, the supplier may require you to indemnify them for certain types of liability, or vice versa. These provisions can be very specific. Both customer limitations of liability and supplier liability caps are common provisions.
Like any contract , supplier agreements may contain security provisions that limit the types of remedies for breach of contract, such as the right to withhold payment for some or all of the goods back to a previous order or the right to cease doing business with the supplier until certain problems are cured. More specific limitation of liability and indemnification provisions often limit certain liability to the extent of insurance proceeds available or coverage limits.
Because supplier agreements typically relate to the provision of goods or services on an ongoing basis, they often have expiry dates or they specify that they continue indefinitely until one party terminates the agreement. For maximum efficiency, supplier agreements should clearly identify the timing or length of the term of the agreement, as well as the manner in which the contract can be terminated, such as with notice for cause or without notice.
For regulated industries, supplier agreements often include detailed compliance mechanisms, including the supplier’s duties to cooperate in investigations and other governmental actions. Other compliance issues may include specified record-keeping, reporting, and training obligations.
There are many other issues that may be addressed in supplier agreements. Some issues are very specific to the type of product or service being supplied. For example, supply contracts relating to aggregate or oil and gas may require that documents such as survey results, permits and other regulatory approvals be provided with each invoice or at other intervals. As another example, supply contracts relating to crops, livestock or other agricultural products may require that the ownership rights to the products be transferred at certain times, or that the crops already be planted before the agreement is signed, or that a warranty be provided for the condition of the crops or livestock.
Whether you have just one supplier agreement or hundreds of them, it is critical to the success of your business to have an efficient system for managing supplier agreements, monitoring compliance, and handling regular business review processes such as audits, renewals, and terminations.
Need for Effective Management of Supplier Agreements
An effective supplier agreement management process is the most important aspect of overall supplier agreement management. A proper proposal reporting and review system, followed by the elimination of both real and perceived impediments to success, will insure vendors understand both their obligations and the benefits available to them under their supplier agreements. Cumulatively, this process will reduce errors and promote appropriate actions to cure otherwise unresolved issues. Disputes ensue when obligations are unclear or not followed or the costs of performance are suddenly unanticipated. This mix can almost always be prevented through careful supplier route reviews and vendor obligation enforcement. Timely deliveries and complaints (either from suppliers or from customers) can be resolved through pre-established review periods for contract compliance and commercial issues. While all contracts require some level of attention, establishing a cadence of periodic supplier agreement contract reviews and supplier visits is critical to the integrity of the supply chain. Failure to deal with the totality of the supplier relationship can have adverse consequence to the integrity of the supply chain.
Supplier Agreement Management Process Steps
Manage Supplier Agreements Throughout the Entire Contract Life Cycle
While most organizations understand how to draft a contract, they often lack a plan for how to "manage" supplier agreements going forward. Supplier agreement management is essential because companies are only as effective as their weakest link. A company that takes the effort to have its supply chain partners on the same page, terms and conditions-wise, is more likely to have a higher level of predictability and consistency. Knowing the parameters of a supplier agreement helps your organization measure risk and make informed forward-thinking decisions.
The fundamental steps involved in supplier agreement management include: negotiation, drafting, execution and ongoing monitoring. In this post we’ll touch each of these four stages from a high-level perspective, as well as provide some suggestions you may find helpful to streamline each process.
Challenges in Supplier Agreement Management Process
When streamlining supplier agreement management, firms frequently encounter roadblocks. While gaining compliance from lawyers and business people may be challenging, it is often far more difficult to get commitment from third-party suppliers who are accustomed to coasting along with the program. It may also be time-consuming to vet third-party supplier terms and conditions, compare them against your own, make corresponding changes, and then obtain agreement from often-reluctant suppliers.
The most common challenges faced include:
â–ºApprovals. A major roadblock to successful document management is often getting internal approval of supplier agreements. Parts of the process can be cumbersome, difficult to track, and times out without sufficient prodding, leading to frequent hiccups in the contracting process. In many cases, issues are resolved at the last minute, often leading to the signature process being delayed while issues are resolved. This often leads to bottlenecks and delays in the signature process.
To facilitate the approval process, internal approval processes must be defined, including specific timelines for each step of the approval process. Stakeholders’ needs and gaps in their processes are also primary focal points, as is a way to track approvals. Alternatively, approval may be based on a business-specific risk profile: as a document moves up the approval chain, the barrier to approval is lower. A supplier agreement may require only a basic approval process if it’s a common document, with few or no redlines that are generally acceptable to all stakeholders. For medium-risk documents, contract managers can have a delegated authority. By the time a document reaches senior management, it should have a 90% or greater approval history. Otherwise, there may be something wrong with it.
â–ºCompliance. Poorly defined requirements may lead to poor compliance with a supplier agreement process. A major challenge in creating compliance around contract management is finding agreement between stakeholders in an organization.
Internal requirements must be clearly defined and, as with approval definitions, a means to adhere to and track compliance must be established. Requirements for compliance should be both business-based and regulatory- or risk-based. If relevant regulations or risks are not met, there should be a systematic tracking mechanism to alert the right people.
Some companies take on a ‘one-size-fits-all’ approach with their supplier agreements, but this can cause avoidable pain down the road. Not all agreements are created equal. Some carry much more risk than others, so to protect their business, companies should pay closer attention to the more risky supplier agreements.
Once compliance guidelines are in place, stakeholders should be appropriately trained to ensure they understand the responsibilities associated with their role in complying with them.
Technological Innovations in Supplier Agreement Management
The supplier agreement management process involves a significant amount of paperwork that has traditionally progressed like a relay race among multiple people (i.e., sales, legal, procurement and sometimes accounting) and departments (i.e., sales, engineering, information technology, procurement and finance). With the advent of cloud-based software solutions, however, supplier agreement management has transformed into an efficient automated process that makes the appointment-setting sub-process easier to efficiently manage . For example, contract lifecycle management software can be used both for creation of the supplier agreement and as a document management tool to track where a particular agreement is at in the approval process or how long the review and approval process has taken. Contract management software also can be used to track performance obligations and milestones going forward in the relationship. For example, milestones can include aggregate sales figures on quarterly dashboards, and performance obligations can include issues like prompt payment and product quality. If both suppliers and those responsible for managing the relationship use the same software, visibility will be enhanced and audit trails will be easier to trace.
Best Practices for Robust Supplier Agreement Management
In order to achieve an efficient supplier agreement management process, companies should follow best practices that include setting clear and transparent terms and conditions, fostering good relationships with suppliers and regularly reviewing and updating agreements to reflect business changes.
To ensure effective supplier agreements, the terms and conditions should be transparent, with clearly defined obligations on both sides, including pricing, deliverables, delivery terms and warranties. The terms and conditions should also establish mechanisms for handling breaches including liquidated damages and termination clauses as well as procedures for contract renewal. Dividing the responsibilities of specific individuals involved in contract negotiation and administration can help prevent conflicts between parties and ensure that the agreement is being properly administered and adhered to over its term.
A good supplier relationship is important for a productive and cost-effective working partnership. In addition to resulting in a better working relationship, a cooperative and respectful approach to managing supplier agreements will likely result in less costly legal disputes down the road. To maintain a good relationship with suppliers, purchaser/supplier agreements need to be followed and monitored with care and discipline. With respect to both negotiated and standard form agreements, the purchaser’s internal procurement and legal departments, as well as outside counsel should be involved in the drafting process. Supplier agreements should be used as tools to ensure deals are properly documented from the outset, rather than simply as formalities to be ticked off the list once the deal is done. If substantive changes are made during the drafting process, those changes should be properly reflected in the final version of the agreement. More importantly, failure to review and update an agreement can expose an organization to liability that could be mitigated through good contract practices.
Regular reviews of contracts and contractual relationships are essential. This will allow parties to understand the state of their relationship with their suppliers and support proactive administration of the contracts. Organizations should maintain a current list of agreements, review the contracts and the actual performance of the parties on a regular basis and ensure the proper documentation is in place to support the transaction. This can help identify disagreements or problems early and plan for contract renewals or amendments, allowing any required changes to be put in place without having to negotiate under pressure. Such reviews can also be beneficial in developing profitable relationships with suppliers.
Legal Implications in Supplier Agreements
A pertinent consideration for any corporation ordering products from a supplier is whether the supplier agreement specifies compliance with all known laws and regulations, which often will include basic quality and safety standards and requirements. Courts have held sellers strictly liable under such circumstances.
We frequently suggest that all supplier agreements include the following provision: Seller hereby represents and warrants that all materials or services sold or provided to Buyer pursuant to this Purchase Order, including without limitation, ingredients contained therein or used in manufacturing thereof shall comply with all applicable quality, safety, environmental, and other governmental regulations and standards.
Although contract law is the realm for supplier agreements, the law also implies additional key responsibilities on the supplier. For example, under the classic "tort" theory of liability, the law has implied a duty upon sellers of goods that such goods be reasonably fit for their intended use . Many recent court cases, however, actually have involved additional points of liability such as fraud in the inducement or "consumer protection" statutes.
Most procedures, including manufacturing, require quality control or assurance of some type. Where a standard exists, it too is a relevant consideration in setting forth what is required. It is also essential to recognize that government safety requirements are being heavily enforced and that an intent to defraud the government can result in serious criminal penalties (see, for example, the Sarbanes-Oxley Act; the so-called "whistleblower" laws, etc.) A supplier should require US supply chains to comply with the Modern Slavery Act, The Supply Chain Transparency Act, Proposition 65 in California, and Prop 65-like acts in other states.
Why does it matter? The supplier relationship is often at the core of a company’s operations. A significant number of companies every day run into quality control issues with their suppliers which become a drain on resources and monetary costs. Taking time to spell out legal obligations in the supplier agreement can help to protect your company and flag these issues up front.