What's a Supplier Contract?

Distributor Terms and Agreements

Distributors have Supplier Agreements, also referred to as supplier contracts. These are contracts you sign to work with them. They set the length of the arrangement, payment terms, exclusivity and selling rights, pricing, etc. They're really important. Make sure you always read through distributor contracts carefully.

What's in a supplier contract?

Supplier contracts range in the level of detail and length. Larger distributors, like KeHE and UNFI have entire welcome packets dedicated to explaining their contracts and rules of engagement. 

Let's break down some of the more common terms you will in supplier contracts:

New Items

Supplier contracts will include requirements for adding new items to their catalog, minimums those products must meet (like UPC codes, nutrition facts, etc.), and the onboarding guidelines. 

Guarantee Sales Agreement

When a distributor takes on a new product, they are also taking on risk. They do not know if your product will sell to their customers. It is standard in supplier agreements to have a certain period of time, referred to as "guaranteed sales period," where the supplier is responsible for purchasing back product if it does not sell. Some guarantee sales periods are as long as a year, others are shorter but withhold payment until a certain threshold of sales are achieved. Read guarantee sales clauses closely!

For your first order, work closely with the distributor buying team. You do not want them to order too much and ask you to purchase back your product. This could get very expensive fast!

Terms and Conditions

We've all heard this language in the context of contracts. We're going to run through the most common terms and conditions we've seen - although, there are many more!

  • Payment Terms: How quickly your distributor will pay you for your product
  • Unsold Product: What happens to the product that is unsold and has expired
  • Price Changes: What happens if you want to change your product pricing
  • Recalls: The process and procedures for a product recall
  • Insurance: You will almost always be required to carry product insurance. Larger distributors will require larger amounts of insurance coverage since you are servicing more customers.

Deductions

Deductions are anything that is "deducted" from your payment. This can range from products returned by customers to compliance issues. At Union Kitchen, we have a product maintenance fee that works as deductions:

Activity Charge
UPC and/or Pack Change* (Requires 30 day notice)
$50 / SKU
UPC and/or Pack Change (Expedited) $100 / SKU
Recall Processing Fee $100 / SKU

*A pack change is anything that requires re-coding in our system including changes to UPC code, pricing, or size, name, or ingredient change.

Allowances are also considered as deductions since they are deducted from your payment. The two most common types of allowances are:

  • Spoilage Allowance - This is insurance in case your product goes bad. The distributor lists a spoilage allowance, typically between 2 to 5 percent, as a deduction on your purchase order.
  • Product Loss Claims / Shelf Worn / Unsalables - Some distributors will offer an additional allowance for product loss or items that did not sell.

Product Information and Pricing

Let's get granular! Sections covering product information and pricing are all about the details. 

Most Favorable Pricing: This clause states that you will provide the distributor with pricing that is at least as favorable as what you are selling to others. Securing the right price for a product is core to the distributor business model. Imagine trying to go out and sell a product that someone else also has and for cheaper. It's a tough case to make.

Shipping and Receiving

This defines how the product is shipped, who has to cover what cost, and the rules by which a distributor will receive your product. Distributors have strict rules for how they will receive a product since poorly palletized product will really slow down their logistics.

Because efficiency is king in distribution, most will have fines attached to receiving products outside the agreed upon terms.

At Union Kitchen, we have the following:

Activity Charge
Mis-ship
Subject to Refusal
Missed and/or Shorted PO Close of PO (may or may not reissue)
Short Dated Inventory Delivered Billed back at +20% margin (wholesale price)
Carrier arrives outside of defined receiving hours and/or outside of PO due date Subject to Refusal and $100 fine
Supplier’s average On Time Delivery Rate < 75% during a calendar quarter $100