A long-term supply agreement sets the rules for every future order, so individual purchase orders can stay short. It should cover volumes and capacity, how prices move, quality and change control, tooling and IP, and how either side can leave.
It sits above your purchase orders. A single machine or a first batch is better covered by a purchase contract, as explained in what an engineering purchase contract should include.
Commercial terms
- Forecasts should state how far ahead you share them, which part is firm and which is indicative, and what you owe if you cancel firm orders.
- Capacity commitments should state the volume the supplier reserves for you and how quickly it can increase.
- The pricing method should link the price to published raw material indices, such as steel, copper or brass, with a review period and a formula.
- Productivity or volume terms should say whether prices change as volumes grow.
- Safety stock or consignment stock should be defined, including who pays for holding it and how long it may be kept.
- Payment terms, Incoterms and lead times should be fixed for the life of the agreement or reviewed on a set date.
Quality, change control and reviews
Attach a quality agreement. It should list the inspection plan, the sampling standard, the documents with each shipment, and how non-conforming parts are handled and paid for. For production parts, require a PPAP or first article approval before supply.
Ban silent changes. The supplier must ask for approval before changing material, process, subcontractor or production site. Unapproved changes are a major reason quality drops after the first container.
Long agreements fail when nobody reads them after signing. Schedule a review every year, covering delivery performance, defect rates, price indices and open changes.
Tooling, IP and exit
These clauses matter most when the relationship ends, so draft them while it is going well. Our guide on tooling cost and ownership covers the tooling side in more depth. Contract law differs by country, so have a lawyer in your jurisdiction review the final text.
- Tooling paid for by you should be named as your property, marked, insured and listed with its location.
- Your drawings and specifications should remain your property and be used only for your orders.
- The supplier should not sell your designs or parts made from them to others.
- The term and renewal should be stated, with notice periods that allow you to qualify another source.
- On exit, the supplier should return tooling, drawings and samples, and complete last-time buys on agreed terms.
- Governing law and dispute resolution should be chosen with care, and international arbitration is often easier to enforce across borders than a court judgment.
Next step
We audit suppliers before you commit, check samples and documents, and supervise production through the life of the agreement. To discuss a long-term supply plan, book a free sourcing review.