Cooperation is necessary for any supplier agreement to be successful. Successful supply chain optimization significantly depends on effective contracts. Effective supply chain management contracts require clear, guidelines understood and agreed upon by all relevant partners. Every point should be detailed and amenable to both parties.
It’s also important to consider that all parties should be protected by the contract. Parties need to feel equally confident about all factors in the agreement. Because of this, the contract and its implications should be carefully thought through as the agreement will be binding.
To be able to create better contracts and manage them well, it’s necessary to think about some basic elements. The guidelines that follow will aid you in developing a suitable supply chain management contract.
Know your Partner
Get to know more about the supplier you will be dealing with. There are countless ways to this and being resourceful is a must in such a situation. Remember, you are planning to enter into a binding contract with another company.
Obviously, most companies and individuals claim to be exceptional business partners in part because they are trying to win a contract. Unfortunately, they could be total disasters for your company.
Social media plays a huge role in gauging customer satisfaction and feedback. From this alone, you would be able to tell if the majority of their customers are promoters or detractors of their business. This would help you get a fair idea of who you are going to be dealing with in the near future.
Of course, online resources, such as the supplier’s website or social media accounts are a requirement but never stop only with what you find online. Remember, reviews can be faked, bought, and selectively promoted.
Always ask for trade references. After all, those who have had an interaction with the vendor can paint the best picture, based on their own firsthand experience. Remember, as a business partner, you have the right to all the data you need to be able to make a sound decision, before entering into a supply chain management contract with the vendor.
Know the Parties
For transparency, you need to be elaborate about the information you provide on both parties involved. A well-penned contract should indicate every important detail about all parties involved.
This can include the following information:
- Specific parties involved.
- Roles of each party.
- All pertinent business information about each party
Put everything into writing and provide everyone with worthwhile and helpful details about all the collaborators involved.
Be Clear About Pricing
It’s vital to be clear on matters of pricing for better working relationships. While this prevents surprises, keep in mind that all parties should be protected not just your company. After all, if your supplier enters into a terrible agreement that it must later abandon, you ultimately lose.
Consider the following areas:
- Discounts (especially for large/bulk orders)
- Mode of Payment
- Pricing for all goods included
- Policy on Return Items
In all businesses, pricing is always a sensitive matter and should be handled thoroughly. Explore key situations parties may encounter which may impact pricing and ensure they are accounted for in the contract. Being diligent and thorough early will help significantly reduce the likelihood of surprises later on.
Declare the Quantity Term
The Uniform Commercial Code (UCC) states that for the sale of goods, the quantity should be specified in the supply chain management contract. For a contract to be considered legally valid, the quantity term must be clearly stated.
This is vital to understand. The UCC has generic “gap fillers” that courts can insert into a contract when absent. That is, when contracts lack certain terms, the UCC prevails. However, there is no such gap filler for quantity. Thus, if a contract for a sale of goods exceeds $1,000.00 and lacks a quantity term, the contract is null and void.
For clarification, quantity doesn’t need to be conveyed in numbers. The contract may reference the purchaser’s requirements for the intended agreement. Thus, minimum, and maximum purchase quantities can be extremely valuable in supply chain contracts to avoid impossible to fulfill unforeseeable demands.
Durations and Timelines
Unfortunately, time is often not given its due diligence in supply chain contracts. It should be necessary for all parties to adhere to timelines as stated in the supply chain contract for supply chain goals to be achieved. Times should be clearly stated in writing. For various tasks, you may optionally specify a precise date or time frame for the relevant task to be completed. Remember that if you fail to sufficiently specify time parameters, other parties can legally and even ethically use that ambiguity to their advantage and your detriment.
Most supply chain contracts deal with reoccurring purchases as opposed to a one-off purchase. In these cases, there should always be a specified duration for the agreement.
You will want to ensure that all parties consider the following:
- The length of the collaboration
- Consequences of premature contract termination?
- Early termination notice
Don’t neglect matters of time only for simplicity’s sake. Keep in mind that while neglecting time frames in your agreement gives parties more flexibility it simultaneously undermines supply chain stability.
All businesses face risks. Risk is unavoidable. However, identifying and preparing for these risks can prove beneficial for all parties involved.
Being sure to specify all possible risks in a supply chain contract and agreeing on how they will be mitigated or resolved can prevent significant disagreement that might otherwise arise.
When reviewing risks to your supply chain partnership, consider trends in the political and economic, and logistical environments, geographic locations, and anything else that can have a negative effect on supply chain performance.
Always ensure that all aspects of the contract are clearly stated and defined. Ask other parties and even people not directly involved in the drafting of the agreement how they interpret clauses and responsibilities. Identify unclear sections and better clarify them.
Avoiding ambiguous statements is vital since these can easily come back to haunt you later on. It’s important to recognize that U.S. courts typically determine legal disputes over ambiguous contract language in favor of the party or parties that did not write the contract. Even so, you should never rely on that status as a way out of the contract. One good rule would be only to enter contracts from the perspective of you drafting the agreement, regardless of reality
As with any legal document, make sure to double-check the contract before executing it. Reviewing is the most important step that can’t be foregone once the contract has been drafted. It is imperative to read the contract meticulously and with full attention to detail. Scan it even for typing errors, misspelled words, or grammatical errors.
To sum it all up, ensure that the contract has no loopholes and is clearly written. Having another person read through the contract is also helpful as a different set of eyes can sometimes pick up things that you may have overlooked. Of course, you should always seek qualified legal counsel to check the contract for any ambiguity or needed modifications.
Only once the contract has been thoroughly reviewed and corrected is it time for all parties to come together to sign your supply chain contract.