Manufacturing Supplier Contract: Everything You Need to Know
A manufacturing supplier contract is created to provide goods or products in exchange for an agreed-upon amount of payment on a set schedule.4 min read
A manufacturing supplier contract is an agreement between two or more parties to provide goods or products in exchange for an agreed-upon amount of payment on a set schedule.
Key Provisions for Supply Chain Contracts
In the ever-growing manufacturing industry, the supply chain of a company can be a source of value and risk. It's important to pay attention to the terms of all manufacturing supplier contracts handled through the supply chain. Doing so can help maximize this department's value while mitigating risk. Some of the most important points to consider when drafting manufacturing supplier contracts include the:
The first important point is the critical commercial terms. When drafting any type of agreement, make sure it captures the commercial terms that are necessary to all parties. Although it might seem obvious when you first glance at the agreement, you could later find that the document you signed doesn't address a critical issue. That specific issue may not be included because it wasn't addressed during the negotiation process. The parties may have reached an agreement on that issue but didn't document the outcome.
No matter why an issue wasn't properly documented, this problem can lead to disputes over the requirements set forth in the commercial terms of the contract. Additionally, failing to agree on the terms could cause the contract to be unenforceable. When you don't agree on a certain issue, the agreement isn't necessarily a failure, but you could face an issue in a legal sense.
If one of the parties can prove he or she didn't agree upon the commercial terms, a court of law may rule that the parties did not have a sufficient meeting of the minds to form a legal, enforceable contract. In most cases, a supply agreement will require a supplier of goods or products to supply specific components or items throughout the contract term at an agreed-upon price. However, this type of agreement will rarely provide an obligation for the purchaser in the contract to purchase a specific number of goods.
Therefore, if this issue isn't addressed during the negotiation period, the customer is simply given an option to purchase goods at a specific price. You may wish to include an obligation for the customer to buy a certain portion of its goods or a certain number of products throughout the term from the supplier.
Before you sign any type of manufacturing supplier agreement, make sure to take the time to analyze and fully understand the sale and purchase commitments outlined. All situations have different needs. If you are the provider of products, you may want to sign agreements only with customers who are willing to take on the obligation to purchase your goods.
If you can't enter into this type of agreement, you may be able to negotiate for a nonbinding contract on both sides in terms of sale and purchase obligations. If the purchaser has an option, but you do not, you would have to reserve some of your inventory without knowing for sure whether it will be purchased.
A contract's duration should be another point you carefully review. Unless you're agreeing to a one-time purchase, such as a spot buy, your agreement should clearly outline how long the contract will last. Without a duration period, an agreement could be terminated by either of the involved parties, as long as reasonable notice is provided.
Although this type of contract can offer some flexibility, it also eliminates stability for the supply chain. In an industry where it takes ample time and effort to locate another provider and enter into a supplier contract, the option to opt out or to terminate the contract could pose a serious risk. A seller may not want to make an investment of resources and capital to provide a product, only to have the buyer leave and find another seller.
If the parties involved in a contract want more flexibility and can obtain it through bargaining power, the best option is to include a clause that both parties agree upon, which allows one of the parties to terminate under specific circumstances. In most cases, the termination clause requires the party to provide sufficient notice for termination. You may choose to include a provision that allows one party to terminate a contract if:
- The control of a business changes.
- One party fails to meet certain milestones.
In certain industries, the party with more bargaining power may insist on a right to terminate the contract for convenience, at any time.
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