Insight into Master Supplier Agreements
A Master Supply Agreement (MSA) is a contract between a supplier and a buyer that establishes the general terms and conditions of the business relationship. MSAs are most often used in long-term supply chain relationships, where the parties may have many transactions over a period of time. In such cases, negotiating all of the transaction terms with each transaction may be infeasible and burdensome. Instead, a MSA allows the parties to agree upon the overarching terms of the parties’ dealings while reserving to the individual purchase order stage (the "Transaction Level") the specifics of each transaction.
For example, a typical MSA may include terms regarding warranties, indemnities, insurance, confidentiality, intellectual property, default, limitation of liability, termination , and dispute resolution. Often, an MSA will provide that any purchase orders entered into between the parties will be subject to the terms of the MSA. Depending on the complexity of the business relationship, the parties may then incorporate additional terms at a Transaction Level to tailor them to the specific characteristics of the transactions. While the MSA addresses the supply of goods, the parties may have separate Contracts for Supply Chain Services, depending on the complexity of the particular Transaction Level.
When an advantageous supplier is identified, having a MSA in place makes it easier to commence business with the supplier. In this way, an MSA is a useful tool in managing a company’s supply chain relationships and can be a key factor in maintaining the competitiveness of those relationships.
Key Provisions in a Master Supplier Agreement
Master Supply Agreements (MSAs) are generally negotiated in the large dollar deal situations in which a supplier(s) agrees to provide products (goods or other deliverables) in connection with some sort of multi-year deal. Because the terms of a master supply agreement set out terms that will apply to multiple purchase orders (POs) or subsequent agreements, the terms can often be quite complex. As a result (and because they can involve relatively high-value goods & materials), MSAs require considerable negotiation and due diligence. As a rule, the Master Supply Agreement will generally include (somewhat) uniform terms covering:
Terms and Conditions. The terms and conditions in the MSA typically cover every conceivable term, including liability limitations, indemnification, termination, licensing & confidentiality, assignment, staging, delivery, payment terms, warranty, insurance, employment standards, default remedies, patent ownership, taxes, etc. A single set of terms and conditions is preferred because it prevents complicated discussions down the road when parties know that a difference in position really comes down to the difference in language in the two drafts.
Pricing. In most cases the pricing terms set out either a firm price schedule or a formula for calculating various product prices, either at the time of the first order or on an ongoing basis. Pricing schedules also often identify shelf prices or list prices for the goods in order to create an apples-to-apples basis to compare quotes from competing vendors.
Delivery Schedules. Delivery schedules typically cover both timing and quantity requirements for the goods, usually in terms of minimum, maximum, or average requirements. It is also common to include accepted shipment method(s).
Quality Standards. Although delivery times and pricing are discussed above, the supplier must typically also meet minimum quality requirements for the delivered products. Sometimes a holder may also wish to include manufacturing processes and/or materials specifications in an MSA to protect their interests.
Dispute Resolution Mechanisms. Dispute resolution in the form of litigation, mediation or arbitration should be considered and spelled out in the MSA.
Master Supplier Agreements: Advantages
By having a master supply agreement in place, both sellers and purchasers can avoid many of the negatives to the purchase and sale process as well as being able to take advantage of a number of positives. Having a master supply agreement allows for both sellers and purchasers to take better control of their business relationship going forward and provides a more predictable and stable environment within which both parties can work.
A master supply agreement generally enables both the seller and purchaser to realize some cost savings by eliminating an entire series of negotiations. In many cases a purchaser will have a single or repeat transaction with a particular seller which will involve the consummation of a number of purchase orders and sales of goods. The normal practice is to provide for each transaction between the parties to be documented by a purchase order. Within that purchase order there will be a set of terms and conditions that are relevant to that tenant only. As such, each time there is a transaction between the parties having a completely new set of terms and conditions creates an administrative burden on the parties. Having a master supply agreement creates a set of terms and conditions that become incorporated within the transaction without having to be separately negotiated and incorporated into the purchase order. This serves to eliminate the negotiation and some of the administration and drafting costs that would otherwise be incurred and each transaction can be documented with the incorporation of that set of common terms and conditions.
Having a master supply agreement in place also permits the seller to understand its own costs. Not having to engage in separate negotiations for each transaction permits the seller to keep its costs to a minimum and to determine what is a commercially reasonable offer that can be made to a number of purchasers, if necessary. This permits a seller to reduce its costs and to make an offer to a number of purchasers that is reasonable and can be applied in a consistent manner.
A master supply agreement allows for a simple process to be followed for the placement of orders. Without a master supply agreement the normal process would entail the purchaser providing a request for a quote on a particular item of product. The seller would then have to provide a quote and the purchaser would review the quote to determine if it wanted to engage in a negotiation. If it did, then the purchaser and seller would engage in a negotiation process and then agree on a price. Once the price was agreed to then terms and conditions and payment terms would also have to be agreed upon. This entire process from the start to the end could take up to several weeks. Once the price has been agreed to, the purchaser would then have to place an order and both the seller and purchaser would now have to negotiate terms and conditions again. The entire process from start to the implementation of the order could take several months.
For example, if the item that was being purchased was required as an input into a production line, it could be very expensive to have a production line waiting for part. At the same time, it may not be possible to maintain an inventory of parts because of the limited cash flow of a business. Such a situation provides a perfect opportunity for the use of a master supply agreement. A purchaser could negotiate a master supply agreement with the seller in which both the terms and the payment conditions are agreed to. As such, when the purchaser needs to purchase an item of part, the buyer could send a purchase order to the seller and the seller would only need to provide a confirmation of the order. This approach would enable the seller to plan ahead and to anticipate what the production numbers would be.
Likewise, if the purchaser needs to be in a position that it is necessary that a part be delivered within a very short period of time, having a master supply agreement allows for a speedy rollout of that new product without having a number of negotiations taking place to implement the needed supply relationship.
Similarly, having a master supply agreement in place allows the seller to plan ahead. Many of the problems that arise occur because a seller does not have an established relationship with its seller so that it can plan ahead to see how much lead time it will give to the purchaser before it will require payment and how long it will take to manufacture the part that is needed. Such planning is an enormous advantage to the seller where the seller can negotiate its payment terms with its purchaser in advance.
In addition, from the point of legal liability, having a master supply agreement that is in place allows a seller to be in a better position to determine what its potential liability is if an issue develops in respect of a contract of sale without requiring a review of all of the applicable purchase orders and the terms and conditions that are applicable in respect of those orders. It essentially gives the seller a correct view of its securities as effectively it has a summary of the applicable terms and conditions such that they can be compared against the general commercial practices that a seller would expect to see.
By having a master supply agreement, it allows both the seller and purchaser to build a long-term relationship. Once the parties have agreed to the terms of supply including prices, those terms and conditions can be used as a basis upon which to operate in an ongoing relationship. Such an ongoing relationship creates a more cohesive interaction between the parties and as a result, a seller is more like to place its products in the hands of a purchaser with whom it has a relationship rather than to look for new purchasers.
For a purchaser to have a negotiated relationship with a seller with whom it deals regularly, that purchaser can tell its clients they can be assured of the quality of the product being provided by the seller and the security that is there in terms of reliable delivery.
Due Diligence When Drafting a Master Supplier Agreement
A Master Supply Agreement (MSA) is a critical component of any successful business relationship between supplier and customer. It typically takes the form of a contract that governs an ongoing supply arrangement, often covering multiple purchases of goods or services over time, sometimes at varying prices or on different terms. An MSA contains terms and conditions intended to apply to all future transactions. In addition to price, commercial considerations of duration, quantity, delivery, payment terms, risk of loss, legal compliance, packaging, and other matters are typically included in an MSA. Although an MSA should address all such matters, the most important factors are price, duration, quantity, and payment terms. It is also advisable to include language to address the effects of a "force majeure" event, such as a natural disaster or social upheaval. While a force majeure event may not excuse performance of all of seller’s obligations, the scope of the obligation may be defined in the MSA. Article 2 of the UCC – which governs the sale of goods contracts (including the sale of goods to consumers) , contains a provision addressing the effect of an "impracticable" performance by the seller. In some cases, performance is excused. In others, a commercially reasonable reduction in the seller’s performance obligations may result. While commercial terms are undoubtedly important when drafting a master supply agreement, there are also several material legal and contract interpretation issues that should be considered when drafting an MSA. These include: It is also important to address the following contract interpretation issues: These issues are only a few of the many that should be considered when drafting a master supply agreement. It is critical that the agreement be tailored for the specific facts and circumstances of each supplier-customer relationship. The matter should be addressed thoughtfully and thoroughly in the MSA, in order to avoid a situation in which the parties are further from an agreed position than when they began negotiations. It is also crucial that the agreement be negotiated and drafted by legal counsel, in order to maximize the likelihood of enforceability in a court of law.
Common Mistakes and How to Prevent Them
While a Master Supply Agreement is often a timesaver for both suppliers and buyers, there are nonetheless common pitfalls that can arise over time when managing that agreement. A Master Supply Agreement is subject to change as the general needs of the business might change. Over time, as changes are made to the agreement or terms of service are added, the risk of running into one or more of these common pitfalls can increase. The most common pitfalls include: It is highly recommended that businesses have a process in place for the regular review of their Master Supply Agreement so that these and other common pitfalls can be avoided. Companies that do not frequently review their own Master Supply Agreement run the risk of a number of issues that can lead to serious operational or financial consequences.
Ideally, grievances between the parties will be settled quickly. However, as a precautionary measure, your Master Supply Agreement also should outline the terms of resolution that both parties are expected to abide by, including methods of handling a dispute should one arise.
Case Studies: Successful Master Supplier Agreements
To illustrate the breadth and depth of benefits that a well-structured Master Supply Agreement can provide, let us look at a few select case studies: A leading automotive manufacturer faced ongoing challenges in raw material shortages and delivery delays from its Tier 1 suppliers. After implementing master supply agreements with key suppliers, the manufacturer experienced a significant reduction in lead times from a previous average of seven weeks to three weeks. This drastic improvement allowed the manufacturer to optimize its production schedules and reduce its inventory holding costs. A fast-moving consumer goods (FMCG) company implemented a master supply agreement with its packaging supplier in order to address ongoing issues with product quality and consistency. With a framework that established clear definitions of product specifications and quality standards, the supplier was able to enhance its in-process quality control checks , reducing reject rates by 30% over three months. This helped the FMCG company avoid stockouts and enhance customer satisfaction. A high-tech electronics enterprise adopted a master supply agreement with its electronic components vendor to clearly define delivery schedules and pricing terms. This not only streamlined invoice processing and payment but also enabled the high-tech enterprise to better manage its cash flows. As a result, it realized a cost reduction of 12% in procurement expenses over 18 months. A large pharmaceutical company entered into a multi-year master supply agreement with a third-party logistics provider to consolidate its logistics services across multiple regions. The agreement facilitated the optimization of logistics operations by standardizing logistics processes, allowing for increased efficiency and cost savings. The pharmaceutical company achieved a 15% reduction in distribution costs within the first year of the agreement.