Advantages of Short-Term Contracts with Suppliers

Dec 16, 2022

In the last year, you may have found it has become harder than ever to find suppliers to provide you with the quality and quantity of goods and services you require from your vendors. The way the current just-in-time supply chain has been less than just-in-time has made even the most confident and proficient procurement professionals feel vulnerable. 

As a leader of your business, now is the time to rethink your relationships, both long- and short-term. After all, a business can only be as good as the suppliers who maintain it. Commitments, short and long, can serve as a two-edged sword: either as a competitive advantage or a debilitating strain on your business. So, let’s examine which is better: long-term or short-term supplier relationships. 

Advantages of Long-Term Contracts

We’ll begin with examining long-term contracts, often the consensus favorite of businesses for a number of reasons. Long-term agreements allow both parties to continue to build on a relationship, establishing bonds between staff on both sides. Familiarity tends to build trust, strengthening those relationships.

Over time, both sides find ways to work together more efficiently and can often find themselves working toward mutual interests. The benefits of long-term agreements include:

  • Locking in costs – Long-term commitments can prevent or limit price increases for the duration of a contract
  • Eliminating repeated start-up fees – Switching suppliers may come with one-time fees that can be avoided with longer contracts
  • Stability – A long-term commitment can provide stability and certainty that may be lacking in a shorter-term contract
  • Stronger relationship – A long-term contract allows both parties to build a relationship and develop a deeper understanding of each other’s needs

However, due to these commitments being long-term, the focus of these relationships tends to drift over time, and as they veer off course, their value to the company can diminish.

That’s why it’s important for your vendor commitments, especially the longer-term ones, to be critically examined at the start, as well as well-managed. Otherwise, your business may find itself committed to an insufficient solution that could erode your company’s profits or reputation during the course of the contract.

Advantages of Short-Term Contracts

How long is a short-term relationship? Typically, short-term contracts have a duration of one year or less. Though short-term agreements are not unusual for larger companies, they can be particularly useful for smaller companies in the following circumstances:

  • Seeking flexibility – A company can test a supplier or fill a gap and keep its options open to search for newer, better, faster, or cheaper suppliers
  • Increased competition – Without a long-term commitment to rely on, vendors regularly compete to win your business
  • Volatile markets – Shorter terms can be advantageous when the prices of materials are unpredictable and better pricing can be anticipated in the near future
  • Customization – Short-term contractors may be more likely to discuss tailor-made solutions that meet your individual needs and create significant value for your business

When it comes to suppliers who are essential or critical to a business, it’s vital to have a continuity plan in place and a list of alternative sources to turn to on short notice.

What It’s Like Working with Short-Term Suppliers

Due to the brief window of time you are engaged and working with these abbreviated agreements, there can be little dialogue and even less trust built between the entities. It’s largely a simple transaction; short and sweet, and you get what you pay for. It will be as if you were making connecting flights, one after another, continuing to look for and find the next best connection to move you along. At the end of the day, you’ll have hopefully gotten closer to your destination and saved money without putting any of your core values or strategic goals at risk.

At the same time, as you continue to seek these short-term contracts, you’ll likely enjoy fair and reasonable pricing as the vendors compete for your business. Vendors may offer credits or lower their fees; perhaps not by a lot, but over time, it can amount to some pretty significant savings.

Additionally, the short-term nature of the contract keeps the vendor on notice. If they want a chance to renew, they need to keep on top of the account right from the beginning. There’s not a lot of time to make up for missteps or poor service, and you will know soon enough whether this is a supplier you want to continue to do business with. If you see they are not worthy of extending or renewing, you can begin to look for a replacement early.

These short-term agreements make it easy and, in many cases, necessary to continue to switch between suppliers (and even back again). It’s a buyers’ market, and you can find yourself the beneficiary of a market situation that has vendors chasing new (or keeping existing) connections to relationships that support their own business.

Long-Term vs. Short-Term Contracts: Which Is Right for You?

When it comes to deciding on the proper length of time for a supplier relationship with your company, there are many factors to consider. Being smart about your business buying contracts can contribute to saving money and increasing productivity and help you achieve your business mission. Having relationships with alternative suppliers is an important way to mitigate risk.

Clearly, relationships with suppliers shouldn’t all be long- or short-term. For many businesses, a mix of the two types of supplier relationships is usually the right choice.

The length of any relationship with a supplier should be influenced by a collection of factors, needs, and business requirements. Both long- and short-term contracts with suppliers are appropriate, so you should take the time to evaluate your individual needs and consider each one on a case-by-case basis. The right length of a supplier relationship may depend on evolving market conditions and your business direction and strategy, but today is always the right time to review or reconsider all of those commitments.

  1. About the Author:

  2. About the Author:

    As Principal with Valesco, Patrick Floeck’s primary responsibilities include business development strategy and investment origination. Patrick received his Master of Business Administration from the Southern Methodist University Cox School of Business, with a concentration in Finance.

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