Shelf Space: The Master of your Supply Chain: Choosing a Supply Chain Partner Is Only Part of the Equation

The Master of your Supply Chain: Choosing a Supply Chain Partner Is Only Part of the Equation

Founders think heavily about how much it will cost to engage a broker, or a distributor, or a co-man, or a co-packer, or a 3PL or all of the above. Naturally, the focus is on finding the right supply chain partners.

But choosing the right partner is only part of the equation. There are a number of other important questions to be considered when entering into an agreement with a supply chain vendor:

• “I got in to this… how do I get out?”
• “If “X” goes wrong, who’s on the hook?”
• “Can I bring in other partners to strengthen my supply chain, or am I stuck with just these folks?”
• “How successful do these people need me to be to keep me?”
• “am I right, am I wrong? My god, what have I done?” (to quote The Talking Heads)

Those questions don't have one answer. Instead, they show up throughout a supply chain agreement — often in provisions that founders skim over or assume are standard. Here's where to look before you sign.

Termination Rights Affect More Than Your Exit Strategy

In a previous case study, we discussed the importance of carefully calculated term. With supply chain partners, the question often isn’t as simple as “when and how can I get out of this.” Supply chain partners introduce a host of different considerations — tail periods, change-of-control penalties, buyout costs, inventory repurchase obligations, etc. Many supply chain vendors have rigid expectations about these complications, and often, they’re not willing to budge. That’s fine, as long as the companies and founders have considered the implications of termination and weighed their options.

Risk Allocation Determines Who Pays When Things Go Wrong 

If a distributor loses or over-ships product, who pays for it? The answer isn’t always obvious and many supply chain vendors build into their agreement risk-shifting provisions to address just that (of course, in their own favor). Founders should look out for these holes; understand them; negotiate them; and figure out if their supply chain partner is willing to bear the responsibility for its own acts or omissions, or that of its agents. 

Exclusivity Provisions Can Limit Business Flexibility

Assuming all goes according to plan, an exclusivity provision empowers a supply chain vendor to invest resources into your company. But if plans don’t go accordingly, there’s risk of being stuck. Exclusivity isn’t necessarily a binary equation: it can pertain to regions, customers or products. Expanding exclusivity across new regions or customers or products can (and should) be subject to mutual consent, rather than automatically springing. Wisely, many supply chain vendors insist and rely on exclusivity. Founders should be mindful of the impact and permanence of these exclusivity provisions in evaluating whether a supply chain partner is a good fit.

What Happens if I Don’t Sell?

Different supply chain partners have different expectations about when and how they get paid. Is it when the company get paid, or after “x” days — regardless of the status of the company’s payment? In what instances should a supply chain partner hold funds that belong to the company, and in what instances can they refuse to release them? If there are expectations from a supply chain vendor of a level or volume of performance, what happens if those levels or volumes aren’t met? Founders need to understand the financial expectations baked into the relationship, not just the fees they'll pay.

The Takeaway: The Agreement Is Part of Choosing the Right Partner

There exists no perfect supply chain vendor agreement. Vendors need to win too, which means every agreement involves compromise. But choosing a supply chain partner isn't just about identifying the best distributor, shipper or broker. It's about finding the partner — and negotiating the agreement — that best fits your company's goals, risk tolerance and growth strategy.

Supply chain agreements are full of tradeoffs. We can help you understand them before you sign, so you know where the risks are, what can be negotiated and whether the deal is the right fit for your business. Find us on Shelf Space, and we'll help you build a supply chain that's designed to grow with your company.

And if the Talking Heads reference struck a chord, then Shelf Space really “must be the place.”