Today, the costs of raw materials are changing faster than ever. Suppliers are hesitant to sign long-term contracts, while buyers are more eager to lock in fixed-price contracts to better manage their budgets.
This situation highlights a big challenge for food manufacturers supply chains: the need for stable supplies from partners that are willing to offer long-term agreements. But, why are long-term contracts so important for food companies today? Let’s dive in.
In the past few years, various factors like extreme weather and political decisions have been affecting agricultural production. These challenges make food manufacturers and importers more cautious in their raw materials (or finished products) purchases and budget planning.
Whether the price of food production increases due to energy costs, intensified by the effects of droughts or floods, geopolitical actions (like the Russian invasion of Ukraine) [1], and many other factors – it’s the job of supply chain managers to optimize proper purchasing of raw materials or food ingredients. Instead of searching for new suppliers and selecting the cheapest offers, purchasing managers prefer stable relationships with trusted suppliers. Additionaly, they often choose annual contracts.
Suppliers prefer short-term contracts to avoid market fluctuations and uncertainty in raw material prices. Plus, it’s hard for them to set aside enough money to secure raw materials for many customers without outside funding.
But what are the crucial benefits for food manufacturers as they begin to sign long-term contracts with suppliers? Is it just a tool for stability, optimizing their production process, or also a risk management strategy?
To ensure our article is practical, we’ve highlighted how long-term contracts benefit supply chain departments over time:
1. Stable Supply Chain
During the pandemic, raw material purchases in the supply chain were often characterized by a predominant focus on short-term transactions. This approach allowed them to react quickly to changes in raw material prices. However, strategies that only focus on the short term can result in increased costs and disruptions in the supply chain.
This prompted managers to shift towards more strategic, long-term approaches. Why?
Partnering with a solid food ingredient supplier helps maintain continuity and adapt supply to ongoing demand. Without requiring extra work from you like time-consuming searching and comparing raw material or food ingredients pricing.
Long-term agreements often means steady flow of ingredients, reducing the risk of shortages that could halt your production. This reliability is crucial for maintaining consistent production schedules. With a long-term contract, you handle natural disasters, geopolitical tensions, or economic downturns better. Constant raw material access improves planning and execution, leading to better scheduling and resource management.
Seedea Insight: Shifting from short-term to long-term thinking involves understanding and managing risk. Effective supplier relationship management and long-term contracts help the supply chain prepare for the future. These strategies are beneficial even when unexpected things happen. By securing the supply chain, you ensure that your procurement processes are efficient, resilient, and lead to significant cost savings
2. More Quality Assurance
Securing the right quality raw materials for internal production is crucial. By doing so, you avoid quality claims, which often arise when purchasing from new suppliers.
Purchasing low-quality ingredients from unreliable suppliers can lead to product defects, health concerns, and damage to brand reputation. Ensuring ingredient quality through trustworthy suppliers is crucial for avoiding negative outcomes and maintaining consumer and internal quality department satisfaction.
What if you partner with a reliable, long-term food supplier? When your supplier provides thorough analysis for each batch, you mitigate potential issues after delivery. Thorough analysis of each batch by your supplier reduces risks after delivery.
Additionally, if your supplier is open to external audits, it indicates a commitment to transparency and ensures the facility’s security. Transparency between two parts is crucial for maintaining trust and compliance. At Seedea, we work with partners who allow customer audits.This ensures full transparency throughout the process.
Seedea Insight: Quality is crucial in today’s food production. Having a dependable supplier that prioritizes the quality of supplied raw materials or food ingredients is essential. Close collaboration with key suppliers ensures product quality and customer satisfaction. Active quality management leads to improved efficiency and reduced costs.
3. Reduced Purchasing Costs
Every supply chain department encounters the challenge of increasing raw material costs multiple times throughout their careers. These escalating costs of raw materials or food ingredients often result in higher prices for their final produced products, prompting them to seek ways to reduce their budget.
Long-term cost savings on purchased raw materials or food ingredients are essential for supply chain departments, emphasizing the importance of effective supplier relationship management. With the continuous rise in the costs of raw materials and food ingredients, finding ways to minimize expenses becomes crucial.
By nurturing better relationships with suppliers and negotiating favorable pricing through long-term agreements, supply chain departments can mitigate the impact of price volatility and better manage their budgets.
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Long-term contracts empower supply chains to select suppliers based on transparent pricing. This aids strategic decisions, ensuring stability and reliability, thereby enhancing efficiency.
Seedea Insight: Long-term contracts empower supply chain departments to prioritize suppliers offering transparent pricing over speculative companies. Ultimately, this helps reduce potential costs arising from unfulfilled contracts and strengthens the overall resilience of the supply chain. Effective supplier relationship management and securing long-term agreements are key strategies for reducing costs and achieving long-term business success.
4. Fostering Supplier – Buyer Relationships
Are your purchases taking too much time? Are you spending excessive days solving problems or getting quotes from your current suppliers?
Securing the supply chain can reduce the number of suppliers you purchase from, streamlining the purchasing process and making budgeting far more straightforward. Less time spent on ordering ingredients means lower operational costs.
Additionally, fostering long-term relationships with a selected group of suppliers enhances partnership and trust between supplier and customer. This collaboration can lead to better overall communication, thus optimizing supply chain performance and driving mutual success. It also results in greater efficiency in meeting each company’s goals.
Seedea Insight: Securing well the supply chain and fostering long-term relationships with suppliers not only streamlines purchasing processes and reduces operational costs but also promotes partnership, trust, and efficiency. Effective supplier relationship management through long-term agreements can lead to significant cost savings, and improved overall performance and success for both parties involved, making it a crucial for company strategy.
5. Detailed Information About Products and Markets
Securing long-term contracts with suppliers not only ensures stability in the supply chain but also provides a wealth of detailed information about products and markets.
Surprisingly, this aspect is often overlooked, yet suppliers who are willing to commit to long-term partnerships tend to offer invaluable insights into market conditions, product harvests, and crop forecasts. This depth of knowledge stems from their profound understanding of the supplier market and their close connections with farmers. By maintaining enduring relationships with these suppliers, food companies gain access to a wealth of information that goes beyond mere transactional exchanges.
Furthermore, supply chain managers benefit immensely from the detailed information provided by suppliers committed to long-term contracts. This comprehensive understanding of the market landscape enables managers to make well-informed purchasing decisions that align with the company’s long-term goals. This strategic approach not only helps in reducing significant costs but also brings about further efficiencies in the procurement process.
With greater confidence in the reliability and expertise of these suppliers, supply chain managers can better navigate market fluctuations and plan their procurement strategies. Unlike the unpredictability often connected with short-term contracts, long-term agreements foster a collaborative environment where both parties can thrive, leading to enhanced supply chain efficiency.
Seedea Insight: By staying updated and well-informed about market dynamics and product situations, supply chain departments can make smarter purchasing decisions. Building strong relationships with suppliers and securing long-term agreements are key strategies for managing rising costs effectively, ensuring lower costs, and driving business success for both buyer and supplier.
6. Promoting Sustainability
One crucial benefit of long-term contracts is the promotion of sustainability in the supply chain [2]. When suppliers and buyers commit to long-term agreements, it encourages the adoption of sustainable practices. Suppliers are more likely to invest in sustainable farming techniques, reduce waste, and implement environmentally friendly processes when they have the security of long-term partnerships. This commitment ensures a more sustainable supply chain that benefits the environment.
For food companies, aligning with key suppliers who prioritize sustainability can enhance their brand reputation and appeal to eco-conscious consumers. Sustainable practices also often lead to cost savings in the long run, as efficient resource management reduces waste and optimizes production processes. Also, continual improvement becomes more feasible with a long-term contract, as communication improves and suppliers better understand the business’s sustainability goals.
Seedea Insight: Long-term contracts promote sustainability by encouraging suppliers to adopt eco-friendly practices. This not only benefits the environment but also helps food companies build a positive brand image and achieve cost savings through efficient resource management. By fostering continual improvement and stronger relationships with key suppliers, businesses can ensure their supply chain is both resilient and responsible.
Summary
These are all benefits we’ve identified. All these elements have one common goal: helping supply chain departments in a long run. With these benefits in mind, you can see that strong long-term contracts are a winning strategy in the rapidly changing food industry.
Long-term contracts play a fundamental role in helping food manufacturers get a stable supply in today’s food market, a highly unpredictable one. More and more food manufacturers replacing short-term contract with long-term ones. No wonder in that.
Supply chain managers face numerous “what ifs” in their daily work, and in such a volatile environment, relying on outdated strategies and structures is no longer viable. Economic and geopolitical concerns have added additional layers of complexity, stifling growth for many food manufacturers. However, with a suitable supplier partner [3], these challenges can be overcome.
Long-term contracts foster stronger relationships with key suppliers, leading to better communication and a deeper understanding of each other’s needs. This understanding facilitates continual improvement in supply chain processes and ensures that both parties are aligned in achieving their business goals. By prioritizing long-term contracts, businesses can navigate market uncertainties with confidence and address challenges proactively.
We hope this list of benefits can be a thought-starter for the plans you make with your supply long-term partners.
Do you need trusted food ingredients suppliers? Contact us to learn how we can help you in purchasing.
Sources:
- “Update: how is the war in Ukraine affecting global food prices?” available at: https://www.economicsobservatory.com/update-how-is-the-war-ukraine-affecting-global-food-prices (accessed on May 28, 2024)
- “Key A More Sustainable Supply Chain” available at: https://hbr.org/2020/03/a-more-sustainable-supply-chain (accessed on May 28, 2024)
- “Seedea Market News” available at: https://seedea.pl/market-news/ (accessed on May 28, 2024)
