1. What is a Manufacturing and Supply Agreement?
A Manufacturing and Supply Agreement outlines the parameters of a business relationship between a distributor and their manufacturer or the supplier of their products. For example, your company designed their own product. In order to sell the product, you might partner with a manufacturer who could produce that product and supply it to your business so that you could distribute the items for sale. This agreement outlines all of the terms of this business partnership.
When determining the terms of the contract, any current or future distribution contracts should be considered. For instance, if your company already has distribution agreements in place that stipulate orders will be filled in a set amount of time, the agreement needs to allow for this provision. These stipulations will also need to be considered when negotiating future distribution contracts.
This agreement will not only have clauses to ensure the timeline on delivery. The cost of manufacturing will also be itemized, as well as any savings for ordering in larger quantities. For a company producing a product, this agreement provides the structure to determine pricing and profits. In essence, the provisions for this contract are essential to the success of an endeavor that hinges on the distribution of a product.
Your business is unique, so the terms and clauses for your agreement should directly reflect your business model and the constraints of your manufacturer and supplier.
2. When Do I Need a Manufacturing and Supply Agreement?
A Manufacturing and Supply Agreement should be used in any business partnership between a manufacturer/supplier and the distributor. If, for example, your company devises a new design or completely new product for the marketplace. Finding the right manufacturer and supplier is only part of the process. You’ll also need to discuss the terms of this business agreement and create a legal contract stipulating each party’s responsibility. Different industries will need various clauses.
In some cases, proprietary information is an integral portion of the contract. If, for example, the product is a new invention that no other business manufactures, it’s important that there’s a clause in the contract ensuring confidentiality between the companies.
It’s also important that there’s a clause indicating where this product can be sold. If you invented a machine to show the future and no other company had anything similar, you would want a clause so that the company putting together the machine couldn’t then sell the machine to a competitor.
Your business model might not need confidentiality or discuss proprietary products. For instance, a Pharmaceutical distributor might have contracts with numerous manufacturers. In this case, the Manufacturing and Supply Agreement might not stipulate that the product can only be sold to your business. But it would likely include information on liability and clauses to meet the many regulatory requirements in that industry.
In short, if your business sells products that you do not manufacture in house, it’s likely that you need an agreement to make sure that your legal needs are covered.
3. Why You Need a Manufacturing and Supply Agreement
The honest truth of the matter is that many companies, even large corporations with impressive legal departments, have contracts that they don’t pay enough attention to. It’s routine for contracts such as manufacturing and supply to be drawn up, signed, and then filed away. That being said, there are a number of consequence of not having an agreement in place:
Your business won’t have a concrete manufacturing and distribution timeline
Perhaps the biggest component of the agreement is the timeline. If the manufacturer doesn’t meet the agreed-upon schedule, the distributor will not be able to deliver promised products to their customers.
Vital information about packaging and logistics will be unclear
There are, of course, other important aspects to this agreement. Information such as packaging and logistics are often discussed in these agreements. When you consider the cost of shipping one package to a relative, you’ll recognize that these “small” considerations can amount to a great expenditure.
Your business won’t be properly protected
Often companies look closely at these terms when the contract is drafted and signed. Then the contract is filed. Until there’s a problem.
The problem – business entities not meeting their contractual obligations, insolvency of one company in the agreement, or legal liability issues from consumers. All of these issues can pose a serious risk to your business. And all of these issues can be discussed within the agreement. If you’ve created a well thought out contract, there should be provisions for the worst case scenario to protect your company and investments.
Without an agreement in place, there are virtually not protections from any of these scenarios. Your company may in fact be liable for manufacturer errors and your partner company’s difficulties can possibly domino to impact your own.
Having an agreement is not enough. It’s important that your agreement is tailored for your own business model and dealings. A good practice is to review your contracts on a regular basis in order to determine whether the clauses and stipulations best meet your current needs.
4. Most Common Uses
As covered previously, this type of agreement outlines the responsibilities of each business in dealings between a manufacturer and a distributor. Different types of companies will need these contracts. A startup will need a Manufacturing and Supply Agreements if they contract another company to produce their product. These agreements span different industries but the common theme is that there is the construction of a product that one party creates and the other sells. Essentially, the manufacturer is only charged with creating a set amount of product for a set price and within a set timeline.
These contracts become essential when there is a dispute. Often the contracts might stipulate a way that disputes should be settled and they will always include termination clauses to protect both parties in the event the partnership should need to dissolve.
In most cases, disputes can be solved through a process. Initially, officers of both companies might discuss the business situation to attempt to reach an agreement. If the companies cannot reach an agreement amicably, it might be stipulated that the matter goes to arbitration or it may be a matter for litigation.
5. What Should be Included in a Manufacturing and Supply Agreement?
Manufacturing and Supply Agreements include clauses that are specific to the business they’re created to serve. However, there are some common uses for these contracts that are routinely included to protect businesses in the event of possible issues. Here are a few of the considerations when drafting your agreement:
- Terms of the Agreement. The term is the length of time the agreement is in place. You might create an agreement that’s good for one year or five years. You might set the terms so that the agreement automatically renews. The contract might also stipulate that a new contract will need to be signed each year.
- Confidentiality and Proprietary Information. In some cases, confidentiality between business entities might be integral. This should be directly addressed within the contract to protect proprietary information from competitors.
- Product Specifications. There are often specifications that need to be met for the product to pass safety protocols and other considerations before being sold to the public. This area of the contract would take into consideration any federal requirements in the particular industry. The product should also discuss the protocol for a situation where the products do not meet standards – ie. what’s the process for returning faulty products to the manufacturer and timeline for replacement?
- Pricing. The contract should stipulate the pricing per item and also account for any savings for larger orders. For a long term contract, this clause might offer some insight as to how to handle price increases over the term of the contract. There should be a protocol in place for increasing prices as the costs of material and overhead fluctuates.
- Logistics. The contract should discuss the cost of logistics. Which entity will pay for logistics and which entity will be responsible for the shipping/packaging of products. Other considerations in shipping include the time frame of delivery and any guarantees on the timeline of receiving products.
- Clauses for Acts of God. While hopefully rare, there are cases where whole inventories have been lost due to natural disasters. This should be a consideration in the contract so that the responsible party can adequately cover products with insurance at the point that the product becomes their possession.
- Clauses for Damage During Shipping. In some cases, products can be damaged during transit due to no fault of the manufacturer or distributor. There should be a provision in the agreement to account for this aspect of the process.
- Termination Clauses. There should be a clause in the contract discussing the termination of the agreement. There might be a number of reasons that termination becomes necessary. One company might wind up insolvent or unable to meet the agreed-upon contract. In this case, it’s important for the remaining company to be able to sever the agreement in order to continue their own venture with a different manufacturer or distributor.
- Liability. When products will eventually be sold to the public, it’s important that liability is discussed in the agreement. There might be clauses containing warranty information from the manufacturer and the agreement can stipulate which entity is responsible for liability to the public.
A manufacturing and supply agreement is essential for any company distributing products that were manufactured by a different entity. There are many possible stipulations your agreement can include to better protect your assets and aid you in addressing possible disputes in the future.