Abledale Law

4 Key Commercial and Operational Considerations in a Supply Agreement

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Whether you need labels for your produce or a key ingredient for your secret sauce, you will be dealing with suppliers.  In our last blog, we gave you pointers on key contractual risks to keep front of mind when contracting with suppliers.  In this follow-up, we will focus on four key commercial and operational terms: scope of supply, payment terms, standard of the goods and delivery. 

It’s best practice to use your own well drafted agreement that deals with the variables discussed here, but that won’t always be possible, particularly with larger suppliers.  So it is important to review supply agreements carefully – ultimately you need your suppliers to perform in a way that ensures your business can deliver its goods to your customers while meeting legal requirements, contractual terms and building a trustworthy reputation. 

1. Scope of supply

As the customer, you will want to make sure that the goods being supplied meet your requirements.  Check that the quantities, specifications and any necessary services or support are clearly described and exactly what you require for your business operations.

If you do not want to be wedded to the supplier, confirm that there isn’t an exclusivity arrangement in the fine print. 

Minimum quantities and commitments to take can also be a trap leading to more inventory than your business needs or wants, so exclude those terms where possible.

2. Pricing and payment terms

Pricing isn’t always as simple as it seems.  Carefully review the complete pricing structure, including unit prices, discounts, and any additional fees or charges, such as storage, handling, freight and packaging.  Factor in any rebates as well to give the overall picture.

In Australia businesses must operate in a competitive landscape.  Pricing should reflect the market value of the goods, and your supplier can’t impose restrictions on what you sell the goods for after they have changed hands.  For example, a contract term prohibiting you from selling the goods for less than the supplier’s suggested price is illegal.

Look carefully at payment terms, including due dates, incentives for early payment, and any late payment consequences, such as interest, late fees or withholding supply.

3. Quality, standards and inspection

The agreement should specify the quality and standards the goods must meet.  In some cases, your business may benefit from the protection of the Australian Consumer Law.  But in case it does not, look for terms which guarantee that the goods are of an acceptable quality, free from defects, do what they are meant to do, are fit for purpose, safe and otherwise compliant with law. 

The process for inspecting and accepting (or rejecting) the goods at delivery is important.  A tight timeframe for acceptance, or no right of rejection, could leave you stuck with subpar stock and a costly argument on your hands.  If you have been provided with an acceptable sample, be sure to check it against what has been delivered.

Depending on the goods, having the agreement include an opportunity for you (or a professional) to audit the suppliers production process or undertake a benchmarking exercise can be beneficial to your business and the quality of your outputs.

4. Delivery and lead times – how reliable is the supplier and the supply chain?

This will be extra important if it’s the first time you have dealt with a supplier.  Do your research and make sure that lead and delivery times and transportation terms align with your requirements, are set out clearly in the agreement and that the supplier can consistently meet them.

Also consider whether you may need buffer or safety stock (held by you or the supplier) as a cushion for unexpected demand or uncertainties within the supply chain.

As the name suggests, this isn’t advice, it’s just a story.  If you’re reviewing the terms and conditions of a supplier, or are looking to develop or improve your own, please get in touch to discuss how we may be able to assist you.  

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