What is a supplier agreement?
Supplier Agreements are a class of agreement that regulates the sale of goods between one party and another. This class of agreement can be very broad, potentially encompassing the following types of transactions:
- The agreements that major retailers like Kroger and Whole Foods require from manufacturers before they let the manufacturer’s goods onto the shelf. We can call this a “retail” supplier agreement, because signing it gains a product access to a market.
- Producers of raw ingredients and bulk commodities have agreements with manufacturers to whom they sell. Call this one a “bulk supplier” agreement. These are the purest form of supplier agreement and generally only discuss major warranties, product specifications, and business points like delivery dates and payment terms. There is not generally much room for negotiation and they are not in the business of sharing any more risk than they have to.
- Copacker agreements and private label agreements, because they are contracts for the purchase of goods. They have many other special features that we’ve covered elsewhere, but it is fair to refer to them as “manufacturing supplier agreements”. For food businesses that use contract packing, a manufacturing supplier is at a pivotal point in the production chain.
Don’t think of Supplier Agreements as individual obligations between two parties. In the food system, supplier agreements are links in your production chain. A product marketer will sign supplier agreements up the chain to retailers, then down the chain to manufacturers and ingredient suppliers. A business leader needs to be able to spot the weak links and then make the entire chain stronger.
How do Supplier Agreements Affect the Food Business?
A good retail supplier agreement puts maximum responsibility onto the manufacturer or marketer for all legal liabilities imaginable. Big retailers understand that is a privilege to get access to their customers, and this reflects in their supplier agreements. The bigger the retailer, the more oppressive the terms will be for the food business. The terms are usually non-negotiable, “take it or leave it” deals. In these agreements, food businesses routinely agree to things like recall expenses, which is a potentially huge liability.
If a food business sells ingredients or commodities, the “bulk supplier” agreement needs to address a few basic warranties. It also needs to clearly describe the characteristics of the product to be sold, in as much detail as possible. This sets the commercial expectation of the buyer. Other than that, these are generally fairly simple agreements.
Things get very interesting, though, for food business that leverage manufacturing supplier agreements. Food companies will (understandably) agree to anything in order to get onto retail shelves. They sign the “take it or leave it” deal presented by retail supplier agreement, and take on all the liability that comes with it. What they often fail to understand is that they are relying on copackers and suppliers to perform to the very high standards set by the retailer. It is therefore essential to consider how manufacturing suppliers and bulk suppliers create risk and how they can participate in mitigation.
Right in the middle of these relationships stands the food business with a product to sell. There is clearly an imbalance of liability between the different supplier agreements, and the imbalance creates risk for the food business that are pinched in between retailers on one side and manufacturers and suppliers on the other.
How to Manage the Risk
The risks are manageable if you know what you are doing. The problem is systemic, and the solution needs to be comprehensive. Most of the tools you have to address the risk are contractual. Here are the steps we recommend:
- Know that the retailers set the standard for risk management in your chain. A well run food business is going to audit its retail supplier agreements and put all of its liabilities into a stack. Retailers require things like minimum levels of insurance coverage, third party food safety audits, food safety documentation, and recall insurance or recall expenses. Once you’ve identified the full spectrum of liability, you can start to push the liabilities onto other parties in the chain.
- Vet suppliers and buy from reputable companies. Bulk supplier agreements will generally contain very lean warranties. Take a close look at the Specification Sheet for each ingredient you are purchasing. The objective product criteria described in the Spec essentially define the scope of your warranty. Look for unambiguous promises about the product. For example, if you need a gluten free flour for your product, the Spec is where you will see the warranty that the ingredient does not contain gluten.
- If you have set up your copacker with the right supplies, the copacker agreement ensures follow-through by the manufacturer. We’ve exhaustively covered copacker agreement before. Essentially, the obligations of the copacker should mirror as closely as possible the obligations imposed by the retailer’s supplier agreements.
- Really consider recall insurance. Recalls are a real probability even when companies are focused on the risks. However, it is not uncommon for retailers to give themselves the unilateral ability to recall your product and send you the bill.
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