What Is a Supply Agreement?

In a supply agreement, a buyer and seller strike a deal. Typically, the seller agrees to meet the buyer's needs in a particular area, such as computer equipment or raw materials. The buyer agrees to deal exclusively or mostly with the seller. Locking in the contract can be a good deal for both parties, but a badly written agreement can cause problems for one or both parties.

TL;DR (Too Long; Didn't Read)

The supply agreement definition is a contract that commits a buyer and a supplier to do business with each other for a set period of time, buying and selling set quantities of goods at specified prices.

Why Use a Supplier Agreement?

From the buyers' perspective, a supplier agreement guarantees them the goods they need to purchase at specified times and for a specified price. Whether you need iron ore, premium rye flour, laptops or copier paper, knowing you have a source available and knowing how much you'll pay can make budgeting and business planning simpler.

For the suppliers, knowing they have a customer who is committed to buying from them makes planning easier. If a computer manufacturer, for instance, contracts with a supplier for 500,000 motherboards over the next six months at a set price, the supplier knows they have an income source locked in. A supplier may offer a discount if the commitment to purchase is large enough.

Supply Agreement Checklist

The business world is full of disasters because of badly written contracts. Before signing a supplier agreement contract, both parties should read it over thoroughly to confirm they get everything on their supply agreement checklist:

  • Price and payment. Price is an essential part of any supply agreement, but the terms are just as important. How long does the buyer have to pay? Is it one lump sum or is a payment plan an option? Who bears the risk of insurance on the shipments?

  • Quantity. How much do you intend to purchase? Without specific amounts, the contract might be found unenforceable if buyer and supplier wind up in court.

  • Duration. Do you want the contract to run for a specific time period or have the option for either party to terminate it at will? The latter choice gives more flexibility but also more uncertainty.

  • Warranties, disclaimers and guarantees. Even if the contract doesn't specify any warranties, the supplier may be bound by "implied warranties" that come with any contract. To avoid implied warranties, the supplier should include a specific disclaimer to that effect.

Supplier Agreement Potential Problems

While some companies use standardized contracts or adapt a master supply agreement template taken from the internet, "standardized" doesn't mean the supplier agreement couldn't cause problems.

  • Does the contract commit the buyer to purchase from the supplier? Some templates only bind the supplier, forcing them to keep the goods on hand without being sure that the buyer will order them.

  • Do the warranties suit this particular contract? A master supply agreement template warranty may include words like "fitness for purpose." Unless the supplier has designed parts or equipment to the manufacturer's specifications, they can't know for sure that what they're selling is fit for the buyer's purpose.

  • Does the purchase and supply agreement commit the supplier to more than they can manage to deliver? Does it require the buyer to pay for more than they actually need?

  • If one party has to concede something, do they get a concession in return? If the price is higher than the buyer wants, can they get better delivery terms, for instance?

  • Does the agreement give the buyer a unilateral right to renew the contract without negotiation? That can work out badly for the supplier if their costs rise.

  • How easy is it for either party to terminate the contract?

Sometimes, one party will insist that the master supply agreement template is the standardized form they use in all their contracts, and they never change it. You can negotiate changes in a standardized purchase and supply agreement just like any other contract. If you can't get the terms you want, it's up to you whether to sign or walk away.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com