Whether a business is just beginning and needs the necessary supplies to start production, or an existing business is simply looking to renegotiate terms or find a new supplier, business owners face a specific set of challenges when figuring out how to best deal with supply agreements. In the aggregate, master supply agreements, or MSAs, are generally contracts that come into existence when a company maintains several contracts with the same supplier, and therefore seeks to streamline the process by merging them into a single agreement. MSAs are also commonly utilized to provide consistency across an organization so that purchasing/procurement teams have a guideline on how to systematically deal with various needs. MSAs provide many advantages, but for those of you considering an MSA or if you are wondering whether you’ve considered all of your options in your current MSA, here are a few tips for navigating them:
- Evaluate Fair Pricing. Cost is usually at the top of everyone’s list when considering a contract. Especially when an MSA is centered around raw material, fair pricing of the good is crucial. Consider having the supplier base his or her contract price of the material around a market-based, published price or index for the good. Goods such as previous metal are represented on a commodity price index which averages prices for the good based on futures and spot prices and often trades on an exchange. This in turn allows investors to trade in the underlying commodities without having to be directly involved in the futures market. By basing the cost of the good off of this real-time average price, it increases the fairness of the contract by providing the cost based on what countless others are paying for the same material.
- Consider Exclusivity. Perhaps if you elect to make a certain supplier your exclusive provider of a certain good, or a certain type of good, this could potentially convince the supplier to grant you a discount or even guarantee your supply over others. However, exclusivity may also become problematic if an issue arises between you and your supplier, leaving you with little recourse under your contract to make up for your lost supply. It’s advisable that you carefully analyze a contract and ensure certain legal provisions are in place before entering into such agreements.
- Expect a Denial of Goods. Whether you’re getting a raw material or a packaged product, as a buyer you should consider the consequences of receiving an incorrect or damaged shipment. Buyers often have the right to refuse a product if it is unsatisfactory but of particular note is the situation in which the buyer does not take notice of wrong or damaged goods right away, but rather waits months to discover the issue. This could be due to the nature of the business, for example buying batteries to operate machinery in bulk, only to realize a few months later that a few of the batteries are defective. In this situation, you should look to your MSA to discover whether you have the right, at that time, to deny the goods and either get monetarily compensated or sent replacements.
- Have an Exit Strategy. No matter what the relationship is between your business and the supplier, contractually, you should always consider what the end of that relationship will look like. Put in writing things like:
- Will this MSA renew automatically or terminate upon completion?
- What are acceptable termination causations?
- Who will pay for certain termination costs and what requirements will you need to survive?
All of the above questions are important factors to consider when creating a new MSA or renegotiating existing relationships with vendors.