Negotiating the best deal means more than just securing the best price. The terms agreed with your supplier should maximise your commercial and legal position. By this we mean, terms that permit stronger cash flow (such as timing on cash out-flow to creditors that matches cash in-flow from debtors) and remedies during dispute (such penalties or indemnities).
Supplier performance can directly impact standards and the general performance of your business.
Your suppliers’ performance has the ability to impact delivery, delivery dates and times, quality, pricing, the overall relationship with your customers and even penalties or discounts. It is crucial therefore to maintain a healthy and dynamic relationship with your suppliers. However, if this relationship fails, it is important that you are able to rely on the provisions of an enforceable written contract to remedy the breach.
The objective of a supply contract is to clearly demonstrate, in writing, the rights and duties of each party as well as the consequences of failure to perform. Many of the provisions contained in a supply contract, such as dealing with penalties for late delivery or early termination as a result of regressive behaviour are not automatic protections offered by common law or any regulations.
Although a verbal or tacit agreement may suffice at times, a written contract remains the best way to protect a business relationship. It outlines the terms of the agreement in plain black and white so that there is no confusion or misunderstandings.
However, a well-prepared supply contract can do so much more — it may even help grow a business. The supply contract secures an already negotiated position, such as timeous delivery or payment terms and allows the business owner to focus on customer satisfaction and profit-making activities.
Be clear on your business model. If you are crystal clear on your business strategy, i.e. how, when and at what price you intend to deliver goods or services to your customers, you will be able to identify potential risks, mitigate those risks and negotiate terms of engagement with more certainty. If, for example, you plan to import products from overseas, ensure that all import duties, levies, taxes and insurances are factored into the pricing, consider any associated consignment costs and the potential risks if a supplier requires a large deposit or provides quantities in batches that effect continuous supply to your customers.
Know the market and your positioning. By evaluating the best procurement practices of your competitors and understanding who the players are in a particular supplier market are you will increase your bargaining power. Knowledge of your local economy and plotting your business positioning will enable you to attract the best suppliers or bargain lucrative terms of supply.
Conduct a due diligence. As you would investigate a potential business or business partner, examine your supplier’s track record and their operational and financial ability to deliver. In addition, ensure that compliance requirements such tax clearance certificates, BEE compliance, labour, safety and health as well as sector requirements, have been met.
If you are distributing to the retail market you are obliged to meet certain consumer protection legislation requirements that may be onerous to your business, particularly if you are not the manufacturer of the product. If you are supplying a large customer or if you are sub-contracting, your customer may place certain arduous obligations on you. In these scenarios the ‘back-to-back’ or ‘matching’ principles may be applied to the various contracts.
Traditionally back-to-back agreements are two transactions/agreements that are linked, and in which the liabilities, obligations and rights of the main contractor agreement are mirrored and passed-on in the second/sub-contractor agreement. Examples of provisions that may be matched include funding and supply duration i.e. matching cash inflow with the debt repayment, resource requirements, performance guarantees, penalties or liabilities.
Timing, scheduling & duration. The contract should record all notice periods, events and triggers including delivery, production, maintenance, supply and support services schedules, deadlines and timetables. This may require active observation or management so that penalties or breaches are not triggered by either party. Include duration of contract, termination, early termination, suspension of orders and requirements for renewal (if any). Record and observe payment terms and conditions for payment such as providing tax or BEE certificates. If the event of an extension of agreement or terms, ensure that all critical terms such as indemnities, representations and warranties are also extended.
Be clear on goods & services. This includes description, specification, content and quality. In addition to recording all inspections, sample of inspection, packaging, delivery and environmental impact information as well as all design, manufacture, supply and delivery functions. Take particular care to record any ongoing maintenance or support that may exceed the duration of the supply.
Penalties. Provide sufficient notice and time to rectify any dissatisfaction with sampled goods, late or non-delivery of goods or services that impact your production line, or non-conformity with manufacturing, packaging or quality. Set-out specific penalties as a percentage of the order for non compliance with regulatory requirements, irregular documentation or delay in delivery or performance.
Service level management. Hold the supplier accountable for failing to meet identified and tested technical standards; any non-compliance should be rectified at the supplier’s expense. Suppliers should be required to maintain a record of the costs of manufacture or delivery of service, a register of key staff and a log of the equipment and tools at their disposal.
The supplier must also be able to demonstrate that its subcontractors and suppliers adhere to the obligations of the agreement executed. The supplier must be subjected to reporting and evaluation whether monthly, quarterly or annually. This may require access to financial performance records and all the necessary documentation should be made available at reasonable times.
For large or risky supply contracts you may insist on the supplier providing bonds or guarantees issued by a financial institution to guarantee any of the provisions set out in the agreement. In addition, you may include terms that limit your liability or indemnify you against any loss, damage or claim from a third party and provides risk cover from your supplier.
Managing supplier relationships is essential to keeping your customer satisfied and therefore, ultimately, the success of your business. The result of effective supplier management is lower operating costs, improved cash flow and better customer service. Sign a legally binding agreement first and then build on your relationship. In this way, if the relationship fails you can rely on the contract to resolve disputes.