Navigating Distribution Agreements – A Guide for SME Suppliers in Malaysia

As a supplier, expanding your business through offline distribution channels can present both opportunities and challenges. Engaging a distributor can open up new markets and increase your reach, but it also comes with potential pitfalls. To navigate this journey successfully and safeguard your interests, a well-structured distributorship agreement becomes paramount. In this article, we will explore common problems that SME suppliers might face in such arrangements and explain how a distributorship agreement can address these concerns.

Common Problems in Supplier-Distributor Relationships:

• Payment Disputes

Suppliers often encounter payment delays, discrepancies in payment, or in some cases, non-payment, affecting suppliers’ cash flow and profitability.

• Product Quality Control

Suppliers brand’s reputation is at stake if distributors mishandle, store, or transport their products improperly.

• Territorial Rights

Distributors might cross territorial boundaries, undercutting suppliers’ pricing strategy and causing conflicts between distributors, suppliers, and even end customers.

• Performance Expectations

Misaligned expectations concerning sales targets, marketing efforts, and product promotions can lead to dissatisfaction and disputes between suppliers and distributors.

• Termination and Exit Strategy

Suppliers face challenge in concluding business relationship amicably.

These are the core issues that suppliers may encounter in their relationships with distributors. A well-crafted distributorship agreement offers an effective way to mitigate these challenges and establish a mutually beneficial partnership.

How a Distributorship Agreement Helps?

• Clear Payment Terms

The distributorship agreement outlines the pricing structure, payment schedule, and consequences for non-payment, which may include financial penalties.

The presence of clear payment terms in the distributorship agreement ensures that both the suppliers and the distributors have a mutual understanding of how payments will be managed throughout the business relationship. This shared understanding reduces the likelihood of misunderstandings or disputes related to payment matters.

• Quality Control Standards, Marketing, and Brand Protection

The distributorship agreement can include specific product standards and specifications that the distributors must adhere to. For example, provisions such as product handling, storage, and quality control. For high-value or perishable products, the suppliers can consider imposing an obligation on the distributors to secure insurance coverage to mitigate the risk of financial loss due to damage or loss of products.

If suppliers have entrusted certain distributors with the rights to promote and market their products in the designated regions, it is important that all promotional and marketing efforts align with the suppliers’ marketing plan. To maintain this alignment, the distributorship agreement can make it a requirement that any promotional and marketing plan must receive the suppliers’ prior approval. This proactive step ensures a harmonious and consistent brand image across all regions.

In addition to the critical aspects of product quality and brand image, it is equally vital to protect all suppliers’ intellectual property rights such as patents, copyrights, and proprietary business and product information. Unauthorised use or alteration of these intellectual properties can cause far-reaching and detrimental consequences to the suppliers’ business. The distributorship agreement should contain provisions specifically designed to safeguard the suppliers’ intellectual property to prevent any misuse or infringements.

• Territorial Rights and Restrictions:

A precise definition of the distribution territory is an essential component of a distributorship agreement. This critical step serves to avoid conflicts, market overlap, and misunderstandings between the suppliers and the distributors. It is also important to outline both online and offline territories. For instance, if the strategy involves e-commerce for specific areas and distributors managing offline sales, this should be explicitly stated in the agreement.

If suppliers plan to reserve specific territories or customer bases for themselves or other designated distributors, it is paramount to incorporate explicit provisions within the agreement. These provisions reinforce the territorial structure and ensures that each party’s responsibilities and limitations are outlined in the agreement to eliminate potential miscommunication.

• Pre-determined Standard

In many distributorship arrangements, minimum order quantities (“MOQ”) are imposed on distributors. MOQ serves to align both suppliers and distributors with specific sales targets and business objectives. To ensure compliance with MOQ, the distributorship agreement can incorporate these requirements. Failure to achieve these requirements may result in penalties and termination of the distributorship arrangement.

The effectiveness of the distributor in distributing the products has a direct and substantial impact on the suppliers’ overall business performance. As such, the distributorship agreement can incorporate key performance indicators, yearly sales targets, and sales forecasts. These metrics offer an objective framework for assessing the distributors’ performance.

• Termination and Exit Provisions:

The distributorship agreement plays a pivotal role in providing a structured framework for termination and exit procedures. Termination clauses including the required notice periods and any associated exit terms or penalties will be specified within the agreement,

Moreover, the distributorship agreement can address post-termination matters such as whether the suppliers can retain the right to purchase existing stock from the distributors or whether the distributors are granted the ability to sell off the remaining stock. By meticulously defining distribution territories, setting performance metrics, ensuring product quality, structuring payment terms, protecting intellectual property and retaining control over marketing, it lays the groundwork for a thriving distributor-supplier relationship. When these elements are thoughtfully crafted and adhered to, they pave the way for long-term success in a competitive market.