Supplier Contract: Everything You Need to Know (2024)

Updated November 5, 2020:

Supplier Contract Overview

A supplier contract is a legal agreement between a business and a supplier to establish the delivery of a set of products or services. Such agreements are used as a means by which to measure the performance of the supplier. In addition to itemizing the materials to be supplied, the supply contract will establish the responsibilities, timeframes, payment, and pricing for the deal.

If properly executed, the supplier contract will help you derive the most value from the supplier relationship. Also, by requiring one, you will compel your external suppliers to take their relationship with you more seriously. It will also make managing your suppliers easier. For these reasons, this contract should be used any time that purchasing from suppliers is necessary.

Tips for Successfully Managing Supplier Contracts

You will likely have to manage multiple supplier contracts at once for your business. Not having a good system for doing so can lead to much frustration for both you and your suppliers, as well as the potential for decreased efficiency and increased project costs. The following tips can help you avoid this:

• Begin each buyer/supplier relationship by clearly establishing who is managing the deal and who will be the primary contact person.
• If you are running a moderate- to large-sized business, creating a small team to handle supplier contracts may be helpful.
• Use a formal screening process to choose your suppliers. A standardized system will reduce human error ad ensure vendors are chosen fairly.
• Keep supplier contracts in a shared database for easy access by managers or other concerned individuals. Contract management software may help you do this.

Having a good relationship with suppliers can also help with contract management. Treating the relationship as a true partnership can help you effectively manage costs and maintain project schedules and quality standards, since the suppliers may be more willing to go the extra mile for you. Maintaining a healthy supplier relationship can be achieved in part by:

• Maintaining open lines of communication.
• Using contract review to evaluate performance or solve problems should they arise.
• Identifying and acting upon opportunities to develop new goals together.
• Treating the supplier fairly and avoiding duplicitous behavior.

Tips for Renegotiating Supplier Contracts

If it becomes necessary to renegotiate a supplier contract, the following tips may be helpful:

1. Do not be demanding. Remember: because there is already a contract in place, the supplier will have no obligation to concede any aspects of the contract. Essentially what you are doing is asking them for a favor, so treating them as an equal partner will be helpful in this; demanding of them what you want is unlikely to yield a favorable result.

2. Take careful note of specifications and expectations. If you specify that you want to receive the same service or product for a lower rate, you should expect that a reduced cost will likely be made up for at some point on their end, either in product quality, service quality, delivery time, or by some other means. Such cost savings may not be stated openly, as well.

3. Think in terms of fairness. Just as demanding a better deal is unlikely to help you, thinking only of how renegotiating will benefit you is unlikely to be a winning strategy. To get what you want in your renegotiation, you may have to be prepared to concede something, as well.

4. Be careful of setting up an opportunistic relationship. If the purpose behind renegotiating your contract is to take advantage of the current market–by asking for a price decrease when market demand is down, for example, the supplier may turn around and try to raise their prices exorbitantly when the market is to their advantage. Therefore, be sure to think in terms of a long-term relationship, not a short-term advantage.

5. Consider cultural and ethical norms. In some cultures, renegotiating a contracted price might be considered unethical. Make sure you are aware of the cultural norms before taking such an action.

6. Consider this step carefully. Before attempting to renegotiate a contract, you should be sure that is necessary and that your business will suffer significantly if you do not attempt to renegotiate.

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