Industry vet pens valuable tips on how to negotiate like a proIndustry vet pens valuable tips on how to negotiate like a pro
A strategic sourcing professional provides insights on negotiating supply agreements, emphasizing the importance of involving internal stakeholders early in the process. He also outlines an alternative approach that is more efficient and effective.
November 21, 2023
At a Glance
- Supply agreements are important because they represent how two companies will work together and protect both parties.
- The traditional process of negotiating and executing supply agreements is often inefficient and ineffective.
- An alternative process with internal stakeholders that sets a time limit on negotiations can be more efficient and effective.
I am not a lawyer, but I have negotiated and executed many supply agreements during my career. Some have been straight forward and others quite complicated, but they all share one thing in common: They are a formal agreement and a representation of how the two parties will work together. This article will cover two main topics: the typical components of a supply agreement and how to negotiate one. Taken together, they will provide a high-level view of this very important, and sometimes misunderstood, collaboration tool.
There are two types of terms in a supply agreement: business terms (how the companies work together) and legal terms (how the two sides protect themselves and resolve conflicts). Below is a quick reference table of the typical items that a supply agreement includes:
Pricing (including change mechanism)
Compliance with laws and regulations
Supply security and dependability
Forecasts and purchase orders
Amendment and assignment
Record keeping and access to facilities
Risk of loss or damage
IP address/ownership of the product specifications
Quality guarantee and recalls
Notification of governmental agency inquiries
Representations, warranties and covenants
Term, termination and renewal protocol
Most people expect the process of negotiating and executing a supply agreement to be as follows:
Send the other party your company template (or receive one from the other company).
Go back and forth with revisions based on negotiations.
Conduct a final review and execute (sign) the agreement.
Unfortunately, this approach tends to constrain the negotiations and waste both time and money, especially if one pays for outside counsel. It also skips an extremely important preliminary step: involving internal stakeholders and getting their input and buy-in on the expected outcome.
Keeping this in mind, below is an alternative process:
Do not send a template. Before engaging with the other party, spend some time preparing a checklist to ensure you capture all the business terms (and some of the legal ones), as well as the excepted range of outcomes for each one. For example, for delivery lead time, if the worst you can live with is 12 weeks and the best you can hope for is 2 weeks, then the acceptable outcome is anything between 2 and 12 weeks.
Go through the checklist with your internal stakeholders (operations, manufacturing, finance, etc.) and get an agreement on the range of outcomes. Those ranges could change because of this consultation and additional items may be added.
Once your checklist is completed, contact the other party, provide them with the checklist (but not your ranges of course) and schedule a session to start a conversation about these items. Expect that the other party may add items to discuss.
Set a time limit on the negotiations and be prepared to “walk away” if expected outcomes do not fall within your pre-determined range; no deal is better than a bad deal. This provides justification to your stakeholders if an agreement cannot be reached.
Once an agreement is reached on all the items, it is now time to involve lawyers. Their job is to incorporate the agreements into a legal document. Once they do, then there will only be a couple rounds of communication to ensure all the agreements were captured correctly, saving time and money.
The need for a supply agreement is directly proportional to the spend level/its potential impact on the business. The higher the spend or impact, the more protection is needed. Understanding what to include in such an agreement and how to effectively secure it helps both parties establish a foundation for a successful relationship.
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