How Special Pricing Agreements Help Navigate Economic Turbulence

It’s difficult to think of a time when manufacturers, distributors and other supply chain partners faced greater volatility than they do today. On top of the ongoing effects of the pandemic, we now add the eruption of war in Europe to our suppressed supply chain to surging inflation that led to extremely high costs for materials, waves of disruptions and immense strain on relationships between companies in the sector.

For these reasons, special pricing agreements (“SPA” or sometimes called “ship & debits”) have become more vital than ever. SPAs allow supply chain partners to cope with an unpredictable economic environment by building price flexibility into contract terms by way of rebate management. When a manufacturer and distributor negotiate an SPA, they agree to supply products to a specific customer or market segment at a reduced price. The intent is to build market share while strengthening trading partner relationships.

As consumer demand, the availability of raw materials and prices become increasingly chaotic amid relentless economic turmoil, it’s essential for suppliers and distributors to implement creative SPAs to offset costs, mitigate risk and build healthier relationships. The supply chain sector will confront major challenges for the foreseeable future, but SPAs open up a range of opportunities that will help manufacturers and distributors thrive.

Navigating a Turbulent Economic Environment

Over the past several months, supply chain crises have led to massive economic contractions around the world. A May 2022 Accenture study found that supply chain shocks in the Eurozone could cost between €242 billion and €920 billion (2% and 7.7% of GDP, respectively). Meanwhile, inflation continues to rise, freight transportation costs are soaring, and supply chain trust is simply broken. Who can operate with such unknowns? A 2021 study by the Economist Intelligence Unit reports that supply chain disruptions can lead to revenue losses of between 6 and 10%.

This brutal economic environment has damaged relationships between many manufacturers and distributors. As prices change with little or no notice, delivery times get pushed back, and consumers become increasingly frustrated with surging costs and delays, supply chain partners often blame one another. This is why SPAs are invaluable tools for manufacturers and distributors who are focused on maintaining their relationships — they allow manufacturers to increase their volumes while giving distributors a way to target particular market segments that are aligned with their business goals.

By building contracts around the unique needs of each partner — such as a shift in target markets or adjustments on the basis of available materials — SPAs can make relationships more strategic and give manufacturers and distributors powerful incentives to keep working together. They are considered the secret weapon to loyal relationship success.

Ensuring supply chain resilience and adaptability

One core function of rebates in the supply chain sector is to enable manufacturers and distributors to quickly adapt to changing circumstances without putting their relationships in jeopardy. Rebates facilitate growth while reducing risk — they protect profit margins by positioning supply chain partners to fuel growth and be rewarded when growth is realized. Mutually agreeing to a program ahead of growth removes the guesswork from relationships between manufacturers and distributors, which minimizes the risk of disputes, angry customers and lost revenue.

According to a survey of supply chain professionals conducted by Gartner, 87% say they’re planning to invest in resilience while 89% expect to invest in agility. A Bain & Company / Microsoft survey reported similar findings — 90% of companies are planning changes to their supply chain network, and over 40% “expect to increase their total supply chain investment with the primary goal of increasing speed, agility and resilience.” The emphasis on these priorities is why SPAs will become increasingly common in the coming years — manufacturers and distributors have to build flexibility into their contracts, and there’s no better way to do so than through customized pricing agreements.

Like many other industries, the supply chain sector is in for a difficult year — dismal economic conditions could persist into 2023 and beyond, and many of the headwinds manufacturers and distributors face show no sign of letting up. SPAs will put supply chain partners in a much stronger position to traverse this hazardous economic terrain by providing robust mutual financial incentives, pricing transparency and the ability to adapt to future crises in real-time.

How a Centralized Data Platform Can Facilitate SPAs

Today’s supply chain leaders rely on data to identify inefficiencies, develop accurate forecasts, and forge strong relationships with their partners. According to the Economist Intelligence Unit, the top technology implemented over the past three years to minimize the impact of supply chain disruptions is a “digital platform to do business directly with customers or suppliers.” When supply chain relationships are informed by accurate and mutually accessible data, it’s easier to establish SPAs that account for shifting conditions and priorities.

To fully leverage SPAs, manufacturers and distributors need a single source of truth to ensure that they’re aligned on goals and processes. Because SPAs are designed to help supply chain partners adapt to changing circumstances in real-time, reliable forecasting is crucial for both parties. This is why supply chain companies are investing in predictive analytics, which is a major component of the broader push toward digitization in the sector. Far too many companies still use antiquated resources like spreadsheets for negotiating and tracking their agreements. It is a waste of resources and time and severely limits the effectiveness of tools like SPAs.

Supply chain partners face an unprecedented array of challenges, and this has put pressure on their relationships like never before. This is why SPAs are becoming more critical all the time — they can help manufacturers and distributors build partnerships that are more profitable and less susceptible to risk. At a time when relationships across supply chains are rapidly deteriorating, SPAs have the potential to reverse this trend by giving manufacturers and distributors a clear path to greater revenue and more sustainable partnerships.