A supply agreement lets suppliers sell services, products, or goods to buyers. It serves as a framework for the two parties’ relationship, establishing their expectations, obligations, and rights to ensure a mutually beneficial agreement.
Types of Suppliers
Here are some types of suppliers that may use a supplier agreement:
- Service providers: Service providers supply services relating to email, IT support, water, electricity, and telephones.
- Subcontractors: Subcontractors provide expertise as part of their contracted services. They can provide turnkey solutions, specialized equipment, fabrication, and manufacturing services.
- Manufacturers/producers: Manufacturers produce components or products at the beginning of the supply chain.
- Distributors: Distributors include wholesalers and brokers buying large amounts of products from manufacturers and then selling smaller orders to buyers.
- Importers: Importers are similar to distributors, but they purchase products from overseas to resell to domestic buyers.
What Is a Supply Agreement?
A supply agreement is a legal document outlining the terms and conditions for the provision of items or services to a buyer by a supplier. It highlights all the details of the business partnership, sets clear guidelines, and mitigates potential disputes.
For example, suppose your company designed a product. To sell the product, you might partner with a manufacturer who could produce that product. They would be the supplier, providing you with products that you could later distribute for sale.
When to Use a Supply Agreement
Here are some situations in which you’d need to use a supply agreement:
Conducting Regular Business Operations
Companies that regularly source services or goods from a supplier use supply agreements to establish ongoing relationships. Businesses in industries like the textile or electronics sectors that use raw materials and components can benefit from having a supply agreement in place.
A company that needs highly customized products can also use a supply agreement to define the quality standards and specifications for each order.
Buyers that intend to distribute the products they receive from suppliers will use distribution agreements, a form of supply agreements.
Reselling Products
Resale or retail businesses use supply agreements when buying products from wholesalers or manufacturers. These documents ensure quality standards and specify pricing terms and the delivery schedule.
Engaging in an Exclusive Business Relationship
Parties can enter into exclusive supply agreements for high-quality or patented products. In this relationship, the buyer supplies specific items exclusively from the supplier for a specific period. This arrangement can ensure high-quality products for the buyer and provide guaranteed business for the supplier.
Outsourcing Services
Companies that can’t perform specific services in-house may outsource services using a supply agreement. They can communicate the scope of services, payment terms, and performance standards to third-party suppliers.
Completing a Project
A company may initiate a new project that it doesn’t have the current resources to facilitate. It can use a supply agreement to request goods and materials and specify the delivery timeline and other details.
What to Include in a Supply Agreement
Here are some elements to include within your supply agreement:
- Parties’ Information. Include the names and property addresses of the parties involved, including the buyer and the seller.
- Provision of Products/Services. Outline the scope, cost, and timeline of the expected products or services. Include a statement of work (SOW) to provide clear instructions.
- Length of the Agreement. The term is the length of time the agreement is in place. You might create a good deal for one year or five years. You might set the terms so the agreement automatically renews or requires the parties’ signatures annually.
- Additional Orders. State whether the buyer can make additional orders under the same agreement.
- Payment. Write the amount the buyer will pay the supplier, including whether the buyer will deliver payment after submitting a purchase order or after the product delivery. Specify if there’s a late payment fee and record any applicable discounts if the buyer orders a large amount of products or a wide scope of services.
- Product Acceptance Terms. Explain how the buyer will approve the quality of the products from the supplier.
- Defect Details. Explain the warranty for defective products and its length.
- Termination Conditions. State how many days of written notice the buyer must issue to terminate the agreement. Specify under which conditions, like a material breach, are grounds for termination. You may need to use a notice of contract termination.
- Grant of License. Buyer represents and warrants to the supplier that all trademarks, trade names, trade labels, trade dress, packaging, and other intellectual property they supply for the products do not infringe upon or otherwise violate the intellectual property rights of any third party.
- Ownership of the Products. State that the buyer owns all the rights to the products the supplier produces. You should also prohibit the sale, resale, or distribution to any entity other than the buyer of the products the supplier produces unless you give written permission.
- Confidentiality and Proprietary Information. You can include a confidentiality clause within your supply agreement to safeguard proprietary information from competitors. For greater protection, you may use a separate confidentiality agreement.
- Clauses for Damage During Shipping. In some cases, products can sustain damage during transit due to no fault of the manufacturer or distributor. The agreement should have a provision for this aspect of the process.
- Liability. When the buyer eventually sells products to the public, they should have guidelines for liability. There might be clauses containing warranty information from the manufacturer, and the contract can stipulate which entity is responsible for liability to the public.
- Force Majeure. Neither party will be liable for the costs or expenses arising from any failure or delay in the performance of the supply agreement due to causes beyond the control of either party.
- Amendments. Outline how you or the other party can amend the agreement.
- Notices. Outline that any notice or communication under the supply agreement must be in writing.
- No Waiver. Include that no party shall waive any provision of the supply agreement unless they expressly make the waiver in writing.
- Assignment. The supplier agrees that they can’t transfer or assign their rights and obligations under the agreement without the buyer’s written consent.
- Governing Law. Detail which state’s laws will govern the agreement.
- Disputes. Outline the legal proceedings the parties will follow if disputes arise.
Benefits of a Supply Agreement
Explore the benefits of a supply agreement:
Increased Cost Savings
Both parties can experience significant savings with a supply agreement. They can negotiate payment terms and pricing guidelines from the beginning.
Buyers can lock in competitive prices they’d otherwise have difficulty obtaining, and suppliers can benefit from consistent business. Suppliers also won’t have to dedicate resources to pursuing as many sales opportunities because they have established contracts.
Better Quality Assurance
A supply agreement contains sections relating to quality control and assurance. As a result, suppliers can experience more success in meeting buyer’s standards, leading to greater customer satisfaction.
Greater Business Continuity
Supply agreements form steady supply chains, meaning businesses can optimize their operations and limit disruptions when sourcing the services and goods they need.
Improved Regulatory Compliance
Because supply agreements contain detailed work scopes and specifications, suppliers can more easily meet industry standards and regulatory requirements. This way, both parties will abide by federal and local laws and minimize risks to their reputations.
Greater Protection of Intellectual Property
A supply agreement helps a buyer protect intellectual property rights when they’re necessary for the production of goods by a supplier. It protects both parties from legal issues and ensures they can remain competitive without compromising sensitive information.
How to Find Suppliers for Your Business
Here are some tips you can implement to more easily find suppliers for your business:
1. Use Online Platforms
Use online platforms to find suppliers for the goods or services our business needs. Consider your specific niche.
If you’d like to enter a business agreement to purchase e-commerce products, use a website like Alibaba. Other marketplaces to research include MFG, Thomasnet, and Global Sources. Narrow your search by filtering suppliers by certifications, location, and product category.
2. Attend Industry Events
Find industry events within your field, such as trade shows and conferences. Depending on how specialized your niche is, you may have to travel to a different city. It can be worth the expense, though, as you can meet suppliers in person, try their products for yourself, and establish a relationship.
Prepare to attend an industry event by researching the attendees and preparing your questions.
3. Perform Online Research and Analysis
Research suppliers online to discover more about their offerings, customers, and reputation. See what others say about each supplier you may want to work with to determine the best way to enter a relationship.
4. Ask for Referrals
Use your existing network to obtain referrals and recommendations. Ask your mentors, peers, customers, and trade publications if they can refer you to trustworthy suppliers.
5. Contact Suppliers Directly
After you have some potential suppliers in mind, contact them directly. Ask to speak to a representative who can verify the supplier’s capabilities and credentials. You can also speak with the representative to see how compatible the supplier will be with your business’s needs.
Request samples, test orders, prototypes, and quotes. Compare prices and communication styles to narrow down your options further.
6. Evaluate Their Offerings
Use a systematic and thoughtful approach to rank your options objectively. Use a SWOT analysis, a cost-benefit analysis, or a risk assessment to identify each one’s pros, cons, opportunities, and threats.
Supply Agreement Sample
Download a supply agreement template in PDF or Word format below:
