In general practice, you offer the same base price of services to all potential customers. However, there often comes a time where a special price agreement, or SPA, is warranted. Whether it is to attract a large client, reward a long-time customer with a price break, or help iron out some issues the client might have run into in the past, crafting a SPA is nothing new. However, you may be forced to consider what is known as a ship and debit agreement in certain circumstances. While other SPAs are not uncommon, a ship and debt agreement is something you’re not going to execute regularly. This would also be the reason why implementing API solutions. As you likely don’t have as much experience creating and carrying out such a SPA, you need to know the ins and outs of a ship and debit agreement and how to document the special agreement properly.
What is a Ship and Debit Agreement
The most stripped-down definition of a ship and debit agreement is when a distributor and supplier work together to offer a specially reduced price for a product. Often, a distributor will work directly with the manufacturer and pay a set amount for the product. The distributor will then turn around and sell the product to customers. At times the customer might pay more or less for the distributor’s product based on various factors (quantity or when the shipment needs to be made). However, other times the manufacturer and distributor might have multiple price points, based on the need of the product, time of year, quantity needed, and so on.
There might be particular instances where the manufacturer and distributor need to lower the cost of a product for a customer, even if the manufacturer and customer don’t have a direct connection together. Other times, the distributor might be paid a sum to set up a direct sale between manufacturer and customer, receiving what is more or less a bounty fee, but never actually touching the product. This can all be turned on its side with ship and debit agreements.
Several variables in a ship and debt agreement can be present, as most agreements are unique to the organizations involved.
If you are lost, you are not the only one. We have so many customers asking us to help define the “how” for many businesses and industries. Oracle nicely defines the elements of Supplier Ship and Debit such as “product eligibility, supplier site, and market eligibility.” This instruction page from Oracle succinctly explains the whys, particularly in the elements section. That said, Our system DOES NOT use oracle supply chain management software, so the software specifics aren’t relevant, but you get the idea. Also, that being said we can talk about custom solutions.
We will continue to dive into the ship and debit agreements, but if you have decided that you need help now, stop reading and reach out to one of our specialists. If not, let’s look at an example of Ship and Debit Agreements.
An Example Of A Ship and Debit Agreement
It is more cost-effective for all parties for a manufacturer to ship material directly to the customer. It’s not generally a good idea to completely cut the distributor out of the sale. It may cause issues between the manufacturer and distributor, potentially leading to the distributor dropping the manufacturer for another company. So, instead of directly cutting the distributor out of the sale, the manufacturer pays the distributor a fee for setting up the sale—the manufacturer ships directly to the customer.
The distributor needs to be part of the sales process in this instance. They facilitate the sale and then pass on the information to the manufacturer. This way, every time the customer makes a purchase, it still goes through the distributor. This is similar to what is known as a drop shipment in the retail space. At times, a storefront may not physically carry a product, so when the customer buys the product, the store orders through the manufacturer, who then directly ships it to the consumer. This makes it more cost-effective for the customer, generates a sale for the wholesaler, and brings in cash flow to the distributor for setting up the sale.
Ship and debt agreements are designed to help reduce expenses for at least one party. Yet, because each ship and debt agreement is unique, it is essential to maintain proper documentation.
Ensuring Favorable Special Pricing Agreements
Documentation is critical to ensure a favorable ship and debt agreement. If a manufacturer shipping directly to the customer, everything needs to be in writing. Will the distributor receive a one-time payment for setting up the sale, or will they be included in every purchase moving forward? Is the manufacturer paying for shipment, or will the distributor reimburse this? Is the cost of shipping built into the price the customer is paying? As the manufacturer is turning into a retailer in this instance, all parties need to understand what is expected of them (and what they will receive in return).
In other ship and debit agreements, the manufacturer and distributor may agree on a special discount price to sell to a customer at a lower rate. This may sound like a distributor-only problem, but if a customer purchases in bulk, should that customer decide to take their business elsewhere, it may result in the distributor ordering fewer products from the manufacturer, costing both manufacturer and distributor money in the end. In this instance, it is necessary for the agreement to establish how long this kind of sale will last if it is a one-time SPA if it will continue, and what the price point might return to following the agreement.
As is often the case in business, the more thorough the agreement is in writing, the safer all parties are. So if you are considering a ship and debt agreement, make sure you cover all the bases. This will protect you and ensure the most favorable SPAs.
Help With Your Ship and Debit Agreement Data
If you are looking for more insights into the world of ship and debit agreements and how you can leverage this information for your business, the team at Incentive Insights is here to offer assistance. Give us a call or fill out our short form to get started.