Debunking The Top Ten Myths About International Distribution Agreements
Once upon a time, a manufacturer had an Israeli distributor. They had a contract, and it had all the usual legal terms.
The relationship was rocky, however. The manufacturer and the Israeli company fought constantly about who should pay for new headcount, new product launches, product training, and attendance at key congresses and trade shows. They disagreed about sales forecasts and rush orders. And they argued endlessly about sales reporting frequency and details, and when to have business reviews.
This story has been repeated over and over, with variations, in my more than 25 years of negotiating distribution agreements. It’s sometimes hard not to get impatient when companies spend lots of time negotiating force majeure clauses (what happens when an act of God prevents contract performance), or assignment or notice provisions.
No doubt these clauses are sometimes the subject of disputes. But operational issues generally make or break the relationship. And the time to think through and discuss them is during contract negotiations. If the parties have detailed discussion and put their agreement in writing, there tends to be fewer issues later.
Here are some of the most common sources of disputes, and some questions to consider.
Investments: How many people will the distributor dedicate to selling and supporting your products? What kind of skill sets do they need? Do you want the right to interview, veto, or replace these people? When there is turnover of personnel, how quickly should these positions be filled, and what recourse should you, the manufacturer have, if the positions aren’t replaced? Which of you will pay for product training, congresses to promote your products, or the creation of localized marketing materials?
Forecasting & Demand Planning: There is nothing worse than having your distributor provide you an aggressive sales forecast, and you purchase or make products based on this forecast, only to find the orders never come. The reverse is equally bad: the distributor suddenly wants lots of unforecasted products shipped immediately, and you don’t have them available.
Often, the distributor does not have the skills to accurately forecast, or to do it the way your company expects. Sometimes cultural differences are the root cause—the distributor may not want to disappoint you, so they provide a rosy forecast. Recognition and skills training often can be beneficial.
Logistics and Supply Chain: When are rush or air freight shipments appropriate? How long are manufacturing lead times? How are product shortages rationalized? Will the distributor incur penalties in their customer contracts if delivery is delayed? What shipping metrics will you use?
If you’re not already, become familiar with INCOTERMS—these are very precise shipping terms that spell out which party is responsible for each element of the costs and risks of international shipping and help avoid disputes.
Pricing: when and how should pricing adjustments occur? This is particularly important in countries where there are large and sudden currency fluctuations, or when product cost is heavily dependent on the price of petroleum or other key raw materials.
Payment: On what terms will you sell your products? When will you extend credit, and if you do, what happens if payment is delayed? Can you or should you cut them off, and if so, under what circumstances?
Reporting and Business Reviews: Will there be an agreed business plan? Will there be quarterly business reviews? Will there be minimum purchases, and how and under what circumstances will they be adjusted? What metrics, besides minimums, are you expecting your distributor to meet? Do you expect sales tracings reports? If so, how often, and in what format?
After-Sales Support: How will returns and repairs be handled? What tasks are the distributor able to handle? Should they receive special training to do certain after-sales support activities? Will the manufacturer or a third party handle? How quickly can repairs be done? When is replacement appropriate?
Take the time to discuss these and any other relevant operational detail with your new distributor. Memorialize these in your contract. Think of your distribution contract less as a document you pull out of the dusty files when things have gone wrong, and more like a blueprint for governing your distributor relationship.
Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.
Editor’s note: This is the eighth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series:
Myth #1: We don’t have time for a contract – we need to get busy selling!
Myth # 2: How we found our distributor is totally separate from our contract.
Myth # 3: Contract templates are great, because that way we can skip the legal review costs.
Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements
Myth #6: Two extremes: We never give exclusivity unless forced to, or, we give exclusivity freely.
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