Myth: We don’t need to spell out operational details in the contract—that’s business stuff, not legal!
Once upon a time, a manufacturer had an Israeli distributor. They had a contract. It was professional, and contained all the usual legal stuff.
The relationship was rocky, however. The manufacturer and the Israeli company fought constantly about who should pay for new headcount, new product launches, product training, and attendance at key congresses and trade shows. They disagreed about sales forecasts and rush orders. And they argued endlessly about sales reporting frequency and details, and when to have business reviews.
Unfortunately, their contract never addressed any of these things. And so, there was never clear agreement.
This story has been repeated over and over, with variations. It’s sometimes hard not to smile when companies spend lots of time negotiating force majeure clauses (what happens when an act of God prevents contract performance), or assignment or notice provisions.
No doubt these clauses are sometimes the subject of disputes (although in 25 years, I’ve never dealt with one). But operational issues? Well, those generally make or break the relationship, and are far more often the subject of disputes.
And the time to discuss and agree on these issues is during contract negotiations, if not before. If the parties have detailed discussions and put their understanding in writing, there will likely be fewer issues later.
Here are some of the most common sources of disputes, and some questions to consider.
Investments: How much time does it take the distributor to get trained and fully up to speed? What is the inventory investment needed, and the likely sales cycle? How many people will the distributor dedicate to selling and supporting your products? What kind of skill sets do they need? Do you want the right to interview, veto, or replace these people? When there is turnover of personnel, how quickly should these positions be filled, and what recourse should you, the manufacturer have, if the positions aren’t replaced? Which of you will pay for product training, congresses to promote your products, or the creation of localized marketing materials? What is the supplier willing to invest in the relationship?
Forecasting & Demand Planning: There is nothing worse than having your distributor provide you an aggressive sales forecast, and you purchase or make products based on this forecast, only to find the orders never come. Almost as bad? The distributor suddenly wants lots of unforecasted products shipped immediately, and you don’t have them available.
Often, the distributor does not have the skills to accurately forecast, or to do it the way your company expects. Sometimes cultural differences are the root cause—the distributor may not want to disappoint you, so they provide a rosy forecast. Skills training by the supplier often benefits both companies.
Logistics and Supply Chain: When are rush or air freight shipments appropriate? How long are manufacturing lead times? How are product shortages rationalized? Will the distributor incur penalties in their customer contracts if delivery is delayed? What shipping metrics will you use?
If you’re not already, become familiar with INCOTERMS — these are very precise shipping terms that spell out which party is responsible for each element of the costs and risks of international shipping and help avoid disputes.
Pricing: when and how should pricing adjustments occur? This is particularly important in countries where there are large and sudden currency fluctuations, or when product cost is heavily dependent on the price of petroleum or other key raw materials.
Payment: On what terms will you sell your products? When will you extend credit, and if you do, what happens if payment is delayed? Can you or should you cut the distributor off, and if so, under what circumstances?
Reporting and Business Reviews: Will there be an agreed business plan? Will there be quarterly business reviews? How often will you meet in person? What is the expected communication cadence? Will there be minimum purchases, and how and under what circumstances will they be adjusted? What metrics, besides minimums, are you expecting your distributor to meet? Do you expect sales tracings reports? If so, how often, and in what format? Will the supplier do field visits, provide leads, or market research? How will new product launches and product/software upgrades be handled?
After-Sales Support: How will returns and repairs be handled? What tasks are the distributor able to handle? Should they receive special training and certifications to do certain after-sales support activities? Will the manufacturer or a contracted service company handle? How quickly can repairs be done? When is replacement appropriate?
Take the time to discuss these and any other relevant operational details with your new distributor. Memorialize them in your contract.
Don’t think of your distribution contract as a document you pull out of your old files when things have gone wrong. Instead, treat it like a blueprint that governs your ongoing distributor relationship.
One of the keys in successful contract negotiation is to recruit distributors and other channel partners that are good fits for you. Join Globalocity’s upcoming webinar on Feb. 22nd, where we’ll walk you through a process for finding and signing up great partners that will consistently grow your indirect channel sales.
And, don’t forget to check out the previous articles in this series for more tips on better distributor contract negotiation: #1, #2, #3, #4, #5, #6, and #7.
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