East West Manufacturing Blog

3 Tips for Painless Supplier Agreements

Written by Andy Reese | July 23, 2015

There are two simple truths I’ve learned in manufacturing: (1) the larger the company, the smaller the NDA.  Why? They have an office building somewhere with more attorneys on hand (or within reach) than most global manufacturing companies would care to count.  And (2) the larger the OEM, the longer the supply agreement.

Thinking back over the supply agreements that have been developed with our customers the reality is that discussion begins a process.  And while lawyers are important to this process, often if you can align simple and mutual business rules, then there is not much for the legal teams to debate.

While this process unfolds, there are typically three main areas where supplier agreements need a little more time to massage through the details:

1. Liability or Risk Management

Whose fault is it when (fill in the blank)?  If there is a failure, a fire, or even a patent infringement, who is responsible for the legal and financial expenses that will follow?  The OEM will push as much as possible downstream to the Global Manufacturing Partner.

The manufacturer will assume as much responsibility as they ‘should.’ Questions you should ask: Who owns the design?  What components are directed?  Who is responsible for patent or potential patent infringement?

2. Indemnification 

A fancy word for “who’s going to pay for this?" The indemnification part of the agreement lays out who will bear the financial responsibility (Global Manufacturer, Company A) for the losses incurred by the OEM (Company B).  It’s all about who will compensate how much, and for what? 

If the product fails in the field, who pays to fix it, replace it, ship it back, repair any collateral damages caused by the part failure, etc.  Neither the OEM nor Global Manufacturer should assume the other is responsible.  It’s why it makes sense to talk about this during the supply agreement conversations.

3. Supply Chain vs. Lead Time

Who’s going to pay for what, when?  If the OEM issues 90 day Purchase Orders (PO’s) but the lead time to purchase the raw materials, source components, manufacture, assemble, and deliver is 120 days, then there is a disconnect. 

Someone will bear the financial responsibility of raw material and components, in-process production, or finished goods.  Solutions include blanket purchase orders to include discreet components for the build and clear communication between the OEM and the Global Manufacturing Partner for sales forecasts. 

I have used the word “partner” when referring to a supply agreement because that is really what this relationship is between the OEM and manufacturer.  When it is mutually beneficial it is a ‘partnership.’  When it tips in one direction or another it becomes more of a ‘contract.’  Just a set of terms and conditions with hard and fast “if then” clauses.

If you find yourself sending one red line after another, from one attorney to another, simply  negotiating contracts, perhaps it’s time to consider what a partnership between an OEM and Global Manufacturing Partner could really look like.