One of the key aspects of any supply chain contract is the section regarding pricing. Nothing is more important in a business deal than determining how much one manufacturer might pay another in a B2B transaction.
In situations where one party has more leverage, that party often includes pricing language that can really impact the economics of any deal.
One type of provision often reads as follows:
Notwithstanding anything in this Agreement to the contrary, the price of each Product will not exceed the lowest price at which Seller sells the same or substantially similar product in the same or lesser quantities to any other customer.
When I see these provisions, the first question I ask any client is whether such a provision is feasible from a business perspective. We then talk about whether the products being sold are custom or “off the shelf” as that will impact whether this provision has been triggered.
Another provision that I am seeing more often is as follows:
Seller shall notify Buyer of cost savings implemented by Seller (e.g. Seller manufacturing productivity improvements) which do not result in a change in drawings, materials, design, fit or function of the Products.
This type of provision is becoming more common as buyers attempt to contractually drive down prices over time. The issue here is that, over time, manufacturers often improve their margins by reducing the overhead associated with making a particular product. In other words, manufacturers become more efficient and hence make more money. Sellers often know this and demand notice of such cost savings so that they can be passed on.
For that reason, I often tell clients to scrutinize these types of provisions as they can jeopardize a company’s margin long-term.