Suppliers and purchasing

Your purchasing can have a substantial impact on profitability. Agreeing the right terms for a supply contract helps reduce costs and improve supplier relationships. Effective procurement also minimises the risk of late deliveries or substandard supplies and the knock-on effects on the quality of service you can offer to your own customers.

Purchase agreements

For many purchases you may simply accept the seller’s standard terms of business. For example, office stationery and travel tickets are offered without any scope for negotiation, while low-cost services are often sold as standard packages.

Although you cannot negotiate alterations, you should check that the seller’s terms meet your requirements. For example, if you are setting up an e-commerce website, you should confirm what reliability your Internet service provider offers and how quickly any problems will be dealt with. You should be prepared to look for another supplier if necessary.

Make sure any supply contract covers all the basics including price, quantity, delivery and payment terms. The purchase agreement should make it clear what product or service quality you can expect. If you are purchasing services, you may want the supply contract to specify which individuals will provide them.

Supply contract negotiation

For larger purchases, you typically prepare a product (or service) specification. Where appropriate, the specification should focus on what you want the product to do, putting the onus on the supplier to provide a solution that meets your needs.

It makes sense to anticipate potential problems. For example, you should consider what the effect of a partial or late delivery would be, and agree what will happen if the situation arises.

You should negotiate purchase agreements constructively, particularly if you want a long-term relationship with the supplier. Being hard to deal with, or squeezing the supplier’s profit margins too hard, is likely to affect the service you receive.

Although spoken agreements are legally binding in principle, you should get a written purchase agreement setting out what has been agreed. This helps avoid confusion and provides evidence in case of a dispute. Ask the supplier to confirm any promises that have been made but not yet documented.

Long-term purchasing agreements

Long-term supply arrangements can be a useful way of protecting yourself – for example, by agreeing a fixed price. Offering benefits to the supplier, such as a guaranteed level of purchases over the next year, can also help you get a better deal.

It’s vital to understand what each side is committing to in the purchase agreement and where the best trade-off lies. Although you can use a purchase agreement to transfer risk to the supplier (for example, by demanding a fixed-price quote for a construction contract) the supplier will aim to compensate for the risk by increasing prices.

Take particular care with complex arrangements such as hire purchase and lease agreements. Make sure you understand how the agreement can be terminated and any notice periods or compensation required. If necessary, take legal advice.