Business Law

Things to consider when creating a supply chain management contract

Whenever you enter into a business, having a contract is essential in ensuring that your business succeeds.

Whenever you enter into a business, having a contract is essential in ensuring that your business succeeds. Not only that, but a well written contract can protect you in the event you find yourself in the midst of a legal battle. Depending on the industry you are in, contracts and what’s included in them will differ from one another. If your business enters into a relationship with a vendor, then you are entering a supply chain management contract. In that case, there are important components that you should incorporate into your contract. Let’s take a look at some of the basic elements you should include as well as things to need to consider when creating a supply chain management contract.

Specify Details of Both Parties

It goes without saying that you should be specific when providing details about both parties listed in the contract. Including the details of both vendor and supplier is critical to a well written supply chain management contract because specificity leaves little room for misunderstanding or who is receiving what and who is supplying what. 

The details should also go beyond just basic information like names and addresses. Instead, consider the following: 

  • Name specific individuals when listing out the parties involved. Depending on the entity, you should decide whether you will include a party’s legal name or legal fictitious name.  
  • Identify the specific roles that each party will take during the duration of the contract.
  • Identify any collaborators in addition to the main party. If a collaborator will be working with you for a limited duration of time, include that as well. 
  • Detail specific business information about the vendor. 

Lastly, as a general rule of thumb, you should always thoroughly vet your vendors beforehand if you are considering entering a contract with them. As part of the vetting process, do your due diligence by investigating the vendor online to establish who they are and their reputability. It does not hurt to go a step further and ask a potential vendor for references as well. 

Identify and Clarify Pricing Structure

When creating a supply chain management contract, clarifying the pricing structure is key to avoiding any misunderstandings in the future. Things to consider when detailing anything related to the price in your contract include:

  • How payment will be transacted and who will be executing the transactions.  
  • Detail when payments will occur and any necessary dates to consider (for example, recurring transactions and one time payment transactions).  
  • Pricing for all included goods
  • Rate of pricing for future purchase of goods (this can be filled out as TBD)
  • Any discounts for large quantity orders
  • Detail the return policy and any dates associated with the return policy. 

Include The Quantity Term

The Uniform Commercial Code (UCC) requires that every contract must include the quantity term in order for it to be a valid contract. If you have a contract that includes a sale of goods over $1,000, then the terms in the contract are unenforceable if they don’t have the quantity term stipulated.

When it comes to the quantity term, the UCC states it needs to be set in writing and the party who is responsible for enforcing it must sign the contract. The best way to go about writing the quantity term without being overly specific and running into restrictions is by writing the quantity requirements in a fixture of minimum and maximum terms. 

Clarify Deadlines and Time Frames

If you have desired deadlines from time to time that you would like your vendor to adhere to, then you must include them when you are putting together a supply chain management contract. 

Not only will specifying deadlines and time frames keep the interaction between you and your vendor productive in ensuring business continues in a timely manner. But it will also keep the relationship on the same page so that you and the vendor both know what to expect and when. Being vague in terms of deadlines and time frames opens the door to miscommunication so it’s best to be as clear if possible when indicating time constraints. 

If your supply chain management contract is based on a relationship that deals with durational purchases, then the time frame and deadlines of these durations must be established in detail as well. Keep in mind that if you are going to establish specific dates, you should include whether or not there are penalties for termination of duration dates. 

Clarify Late Fees

Your supply chain management contract should have a section dedicated to late fees. Decide what actions should have a late fee attached to them and what the fee for that action is. Avoid vague language and specify the late fee for every action. Some actions to consider include:

  • Late payment of initial or recurring transactions.
  • fees associated with undelivered goods or inadequately delivered goods.
  • Fees associated with advertisements and marketing if necessary.
  • Any other fees specific to your industry.

Identify Risks

Identify specific risks that exist in your industry and include them if necessary in your supply chain management contract. Risks can be anything that could directly impact your business. These include factors such as:

  • the economic and political climate
  • Transportation and location risks
  • The quality of the product

When incorporating risk factors, be sure to include detail on what may happen in the event of these risks. Depending on your industry, it may be to your benefit to include an Act of God Clause to protect you against unforeseeable events. 

Avoid Vague Language

Vague language in any contract opens the door for miscommunication, misunderstanding, and in worst-case scenarios, lawsuits. The best way to protect yourself is by staying away from vague language and being specific when needed. Specificity should be focused on aspects including: 

  • How long the contract will last and when renewal dates will occur. 
  • Time frame for shipment and payment schedules
  • The parties involved
  • Termination terms

Review Your Contract

Once you have incorporated all the elements necessary to your business in your supply chain management contract, it’s important to do a double and even triple check over the details. If possible, have another set of eyes in your industry take a look at your contract to be sure you have not missed any critical elements. It may be helpful to also have an individual in a different Industry look at your supply chain management contract as well. 

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