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Framework supply agreement: definition & important aspects
Framework supply agreement in a nutshell:
A framework supply agreement is a contractual agreement between the purchaser and supplier for recurring deliveries of goods at fixed conditions over a defined period of time. For the purchasing department, this ensures stable prices, guaranteed availability and reduced process costs thanks to simplified order processing.
Example: An automotive supplier concludes a 24-month framework agreement with its steel supplier for the delivery of 1,000 tons of sheet steel per year at a fixed price of €900/ton, with monthly call-offs of at least 50 tons.
Contents
What is a framework supply agreement?
Conditions and contents of a framework supply agreement
A carefully drafted framework supply agreement is the foundation for a successful and long-term business relationship between buyer and supplier. It defines the general terms and conditions under which future deliveries will take place, thus minimizing potential risks and ambiguities. The key elements of such a contract include
- Contract term: A clear definition of the validity period is crucial. It determines the period over which the agreed conditions apply. A precise term creates planning security for both parties and enables a strategic alignment of the business relationship.
- Price conditions: The determination of prices and any price change clauses forms the core of the contract. This is where the costs for the delivered goods are determined and mechanisms for price changes, for example in the event of market fluctuations or currency fluctuations, are agreed. Transparent pricing conditions prevent misunderstandings and financial discrepancies.
- Terms of delivery: This section regulates the details of the delivery of goods. This includes delivery times, delivery locations and the selected delivery method. Clear delivery terms ensure that the products are delivered on time and to the right place, which is essential for maintaining production processes and supply chains.
- Terms of payment: Agreeing payment terms and methods ensures financial stability and liquidity on both sides. Whether prepayment, payment on account or special payment terms - precise payment terms prevent payment arrears and promote a trusting relationship.
- Quality standards: Defining the required quality of goods and the corresponding test procedures ensures that the delivered products meet the agreed specifications. By defining quality criteria and acceptance processes, complaints can be reduced and satisfaction increased.
- Termination conditions: Conditions under which the contract can be terminated provide legal certainty. Notice periods, possible reasons for early termination and consequences in the event of a breach of contract are set out here. This protects both parties from unexpected termination of the business relationship and enables orderly processing in the event of termination.
A comprehensive framework supply agreement that covers all these points in detail forms the basis for stable and efficient cooperation. It allows both parties to focus on their core competencies while providing legal and operational clarity. By taking these conditions and contents into account, the contract becomes an instrument that promotes trust, minimizes risks and paves the way for a successful long-term partnership.
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Advantages & disadvantages of the framework supply agreement
Advantages of the framework supply agreement
A framework supply agreement offers companies numerous advantages that make their business processes more efficient and easier to plan. Stability and planning security are paramount. Long-term price and supply agreements allow companies to plan their resources better and protect them from unexpected price fluctuations. This makes budgeting easier and ensures a constant supply of required goods or raw materials.
Another significant advantage is the cost savings. Fixed conditions prevent companies from being negatively affected by sudden price increases on the market. This can be a considerable financial advantage, especially in industries with volatile prices. The framework supply agreement also increases efficiency within the procurement processes. As there is no need for repeated negotiations and contract conclusions, the administrative effort is significantly reduced, which saves time and resources.
Closer cooperation with the supplier is also a positive aspect. A long-term relationship strengthens the trust between the parties and can lead to better conditions, preferential treatment or joint innovation projects. These partnerships not only promote the exchange of information, but can also lead to competitive advantages.
Disadvantages of the framework supply agreement
Despite the many advantages, there are also disadvantages that should be considered when deciding on a framework supply agreement. Being tied to one supplier can limit flexibility. Companies have less leeway to react to market changes or to choose alternative suppliers who may offer better conditions or more innovative products.
Another risk is susceptibility to market changes. If market prices fall, the higher prices previously set in the contract may be disadvantageous. This can lead to competitive disadvantages, especially if competitors benefit from the lower prices. There is also a dependency on the supplier's performance. Quality losses or delivery problems on the part of the supplier have a direct impact on the company and can lead to production losses or delays.
These disadvantages underline the need to plan framework supply agreements carefully and review them regularly. It is important to include clauses that allow flexibility and minimize risks in order to take full advantage of the benefits of a framework supply agreement.
Example of a framework supply agreement (incl. sample template)
A manufacturer of electrical appliances was faced with the challenge of reducing its procurement costs and increasing the efficiency of its supply chain at the same time. To achieve this goal, the company used Tacto software, a specialized tool for supplier management and procurement optimization.
With the help of Tacto, the manufacturer analyzed its existing supplier relationships in detail. The software made it possible to evaluate data on order volumes, delivery frequency, price trends and quality standards. This analysis enabled the company to identify those suppliers with whom it would be particularly worthwhile concluding a framework supply agreement.
Once the potential suppliers had been identified, the manufacturer concluded a framework supply agreement with them. For example, a three-year contract was concluded with a supplier of electronic components. The contract stipulated fixed prices, quality standards and delivery conditions, while the specific quantities were regulated flexibly via call-off orders.
Savings and benefits through the use of Tacto and framework supply agreements:
- Cost reduction: Thanks to the fixed price agreements in the framework supply contract, the manufacturer was able to avoid price increases on the market. Identifying the right suppliers with Tacto led to additional savings, as optimal conditions were negotiated.
- Increased efficiency: The software helped to reduce administrative work by automating processes and bringing transparency to supplier selection. The elimination of repeated negotiations saved time and resources.
- Improved supplier relationships: Long-term contracts and closer cooperation have enabled quality standards to be improved and innovation potential to be jointly tapped.
- Planning security: Fixed delivery conditions and quality agreements enabled reliable production planning and minimized the risk of delivery bottlenecks.
Through the strategic use of Tacto to identify suitable suppliers and the subsequent conclusion of framework supply agreements, the manufacturer of electrical appliances was able to optimize its procurement processes, reduce costs and increase efficiency.
Conclusion: When does a framework supply agreement make sense?
A framework supply agreement is particularly useful for companies that have a regular requirement for certain goods or raw materials and want to rely on long-term business relationships. The fixed conditions and planning security can reduce costs and make procurement processes more efficient. The framework supply agreement offers considerable advantages, particularly if stability in the supply chain, consistent quality standards and close cooperation with suppliers are desired. Nevertheless, each company should check individually whether the long-term commitment and the specified conditions are compatible with its own flexibility requirements and market conditions. Overall, the framework supply agreement is a strategic instrument which, if used correctly, can lead to sustainable success in procurement.
