Understanding and Dealing with Supply Chain Participants | Practical Law

Understanding and Dealing with Supply Chain Participants | Practical Law

Companies frequently rely on third-party service providers and sellers to help design, produce, manufacture, distribute and sell their products. These third-party providers can be crucial members of a supply chain and help a business increase profits by getting products to market more quickly and efficiently. This update provides an overview of the role supply chain participants play in a commercial transaction. It also provides helpful drafting tips and highlights agreements that a company can use when contracting with supply chain participants.

Understanding and Dealing with Supply Chain Participants

Practical Law Legal Update 7-594-3666 (Approx. 8 pages)

Understanding and Dealing with Supply Chain Participants

by Practical Law Commercial
Published on 13 Jan 2015 • USA (National/Federal)
Companies frequently rely on third-party service providers and sellers to help design, produce, manufacture, distribute and sell their products. These third-party providers can be crucial members of a supply chain and help a business increase profits by getting products to market more quickly and efficiently. This update provides an overview of the role supply chain participants play in a commercial transaction. It also provides helpful drafting tips and highlights agreements that a company can use when contracting with supply chain participants.
When selling goods, few companies actually perform every step involved in getting a product to market, including tasks related to:
  • The product's design, production, manufacture, distribution and retail sale.
  • Customer support for end users.
Instead of performing these tasks in-house, many companies rely on a series of relationships with third-party sellers and service providers, known collectively as a supply chain. A supply chain is a network of individuals and businesses that work together to bring products from the initial concept creation, research and development, design and manufacture through to the sale and delivery to end users. For example, a party selling goods could collaborate with a:
Using a well-constructed supply chain can increase a party's profitability and reduce its losses by:
  • Increasing customer sales.
  • Reducing inventory and operating expenses through efficiencies.
  • Transferring costs of doing business to other supply chain participants.
  • Transferring risk of loss to other supply chain participants.
This update provides an overview of the role that manufacturers, distributors, resellers and sales representatives play in a sale of goods transaction. It also provides helpful drafting tips and highlights sample agreements that a party can use when contracting with these supply chain participants.
For more information on supply chains, including information on distribution channels and important legal issues, see Practice Note, Supply Chain Overview.

Working with Manufacturers

A company might outsource work to a third-party manufacturer if it is either unwilling or unable to manufacture its own products internally. Manufacturers can perform a variety of tasks in the supply chain, including:
  • Engaging in pre-manufacturing activities such as concept creation, research and development and product design.
  • Manufacturing or producing their own off-the-shelf products or custom products based on third-party specifications.
  • Selling products to others in the supply chain for resale, such as distributors, or directly to end users for consumption.
When negotiating and contracting with third-party manufacturers, a business should remember to address a variety of key issues, including:
  • Each party's principal obligations to buy or sell goods exclusively or non-exclusively from or to the other party.
  • The terms under which the business orders goods from the third-party manufacturer, including detailed language on delivery, inspection, acceptance, pricing and payment terms.
  • Any restrictions on the business' rights to use or resell the goods or the manufacturer's rights to manufacture and sell the same or similar goods to other parties.
  • How each party's intellectual property rights and confidential information is protected.
  • How the parties allocate risks through representations and warranties, product warranties, indemnities and other remedies.
  • The term of the agreement and the conditions under which the parties can terminate.
For sample forms of manufacturing supply agreements, see Standard Documents, Manufacturing Supply Agreement (Pro-seller) and Manufacturing Supply Agreement (Pro-buyer).
For more information on preparing a manufacturing agreement, see Drafting and Negotiating a Manufacturing Supply Agreement Checklist.

Working with Distributors and Resellers

Distributors (see Distributors) and product resellers (see Resellers) perform similar activities. Generally, each purchases goods for resale to third parties and bears:
  • Inventory risk.
  • The risk of loss regarding the goods.
  • Credit risk related to customers.
However, they can have different requirements in the supply chain. For example, distributors generally have greater volume demands than resellers, but fewer retail locations and less contact with end users.
When dealing with distributors and resellers, a party should address the same issues above that it would address with a manufacturer. It should also specify the distributor or reseller's:
  • Inventory and storage facility maintenance obligations.
  • Obligation to maintain the appearance and condition of its retail locations, outlets and product displays.
  • Duty to provide end user support.
For more information on distributors and resellers, see Practice Note, Distributors and Dealers.

Distributors

Distributors, also known as wholesalers, are middlemen who purchase goods from manufacturers or other suppliers for their own account, take title to the goods and then resell them to others in the supply chain, including:
  • Other distributors.
  • Resellers, such as retailers.
  • End users, such as consumers or companies.
For sample forms of distribution agreements, see Standard Documents, Distribution Agreement (Pro-supplier) and Distribution Agreement (Pro-distributor).
For more information on preparing a distribution agreement, see Drafting and Negotiating a Distribution Agreement Checklist and Practice Note, Distributors and Dealers: The Distribution Agreement.

Resellers

A reseller's role varies based on the industry in which it operates. Generally, a reseller buys goods from manufacturers or other suppliers and resells them to end users for consumption or incorporation into another product. A reseller can be, for example, a:
  • Dealer that resells goods in typically regulated markets, such as the automobile industry.
  • Retailer that resells goods to consumers.
  • Value-added reseller that integrates each supplier's product with one or more features or services before selling the integrated product to end users.
For a sample reseller agreement, see Standard Documents, Product Reseller Agreement.
For more information on preparing a reseller agreement, see Drafting and Negotiating a Product Reseller Agreement Checklist and Practice Note, Distributors and Dealers: The Distribution Agreement.

Working with Sales Representatives

A sales representative is an independent contractor who markets, advertises, promotes and solicits the sale of goods on a supplier's behalf to the supplier's customers. Generally, sales representatives are paid on commission.
Unlike distributors and resellers, sales representatives typically do not:
  • Purchase the products for their own use or for resale to customers.
  • Take title to the products.
  • Arrange transportation, insurance or storage of the products.
  • Physically handle the products.
  • Assume risks related to the products, such as inventory, product liability and warranty risks.
When negotiating and contracting with a sales representative, a business should ensure that it addresses:
  • The sales representative's obligations to market the products.
  • The terms under which the sales representative earns his sales commission, including how and when his commissions are paid.
  • The protection of the business' confidential information and its intellectual property rights in the products.
  • How the parties allocate customer credit risk and other liabilities.
For more information on issues that a supplier and sales representative should consider when structuring the sales compensation provisions of a sales representative agreement, see Practice Note, Sales Representative Agreement: Sales Compensation Issues.
For a sample form of a sales representative agreement, see Standard Document, Sales Representative Agreement (Pro-supplier).
For sample commission payment terms, see Standard Clauses: