Supply Agreements: Volume Estimate or Purchase Commitment
When entering supply agreements, buyers and sellers have different interests around the volume of goods to be purchased or supplied. A buyer wants maximum flexibility on the volume of goods it will order, while seeking favorable pricing and security that the seller can provide the volumes the buyer needs. A seller, on the other hand, wants the buyer to commit on the volumes it will purchase, so the supplier can plan its production, ensure predictable sales, and align pricing with volumes.
The purpose of this article is to address these different views on volumes and summarize each party’s perspective. The table below lists key topics of interest for buyers and sellers with respect to volumes. It shows how each party might address them in a contract to support their respective interests. Ultimately, what is drafted in the contract will be the outcome of negotiations between the buyer and seller on these volume-related issues.
Volume Estimate vs Purchase Commitment
Buyer | Seller |
o goods supplied don-t comply with specifications or other contractual requirements o other factors impact volume/forecasts (e.g., a change in regulation that impacts demand for goods, end/customer demand falls significantly, buyer changes its business plan) |
o Tie pricing to amount of volumes ordered o Seller has right to change pricing if certain volumes not met (i.e., change pricing if volume estimate/market share not met) o Seller has right to extend length of contract if certain volumes not met during initial term o Orders can’t be cancelled or buyer must pay non-recoverable costs of order |
Market Share
[Market share is a % of buyer’s overall net requirement for goods in a market that is given to seller, e.g., 80% market share in EU means buyer purchases 80% of its widgets for the EU market from that seller, and buyer purchases remaining 20% of widgets for the EU market from other suppliers.]
In calculating the net requirements this would be what buyers actually purchase and receive
Buyer | Seller |
o goods seller provides aren’t complying with specifications or other contractual requirements o other factors impact volume/forecasts (e.g., a change in regulation that impacts demand for goods, change in buyer’s business plan)
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Tolerance Level
(For volume estimate and/or market share)
Buyer | Seller |
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Order Modification
Buyer | Seller |
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Securing Production/Production Planning: Rolling Forecast
Buyer | Seller |
o on a regular basis ideally quarterly at least annually o in event goods seller provides aren’t complying with specifications or other contractual requirements o if other factors impact volume/forecasts (e.g., a change in regulation that impacts demand for goods or change in buyer’s business plan) |
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Securing Production/Production Planning: Production Capacity
Buyer | Seller |
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Securing Production: Contingency Plan
Buyer | Seller |
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Supplier Inability to Meet Volumes
Buyer | Seller |
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Safety Stock
Buyer | Seller |
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Featured Image by Angelique Johnson from Pixabay