---
title: "10 Issues to Note When Signing a Distributor Contract"
description: "This article outlines ten critical issues distributors should address in contracts with suppliers, including product quality, slow-moving new products, cross-regional selling, out-of-stock compensation, price protection, price adjustment notifications, damage compensation, cost sharing, sales territory, sales incentives, and contract duration. It emphasizes clear terms to protect the distributor's interests and avoid losses."
author: "New Distribution"
publisher: "New Distribution"
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published: "2015-08-28"
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# 10 Issues to Note When Signing a Distributor Contract

> This article outlines ten critical issues distributors should address in contracts with suppliers, including product quality, slow-moving new products, cross-regional selling, out-of-stock compensation, price protection, price adjustment notifications, damage compensation, cost sharing, sales territory, sales incentives, and contract duration. It emphasizes clear terms to protect the distributor's interests and avoid losses.

**1** Product Issues
**Quality Issues:**
Product quality problems should be fully borne by the supplier, with unconditional returns. If the supplier is not the quality bearer, have the supplier sign such an agreement with their upstream customer. The response time for handling quality issues and compensation for delayed handling must be clearly defined.
**Slow-moving New Products:**
This corresponds to the "return and exchange clause." For brands you are newly in contact with, adhere to the principle of careful selection, and be confident that "even if the supplier doesn't handle it, you can still sell it" when stocking up, after all, it's a waste of time to argue with the supplier. Just repeatedly ask the supplier and your friends in various places to figure out which products are bestsellers. Sell bestsellers first, and once you have a foundation with bestsellers, then sell new products you are confident about, so slow-moving inventory won't be generated on a large scale.
For products that are slow-moving, be very careful with clauses that say "no returns for non-quality issues." If you really want to take on this supplier's products, be sure to find a supplier representative with decision-making power and resolve the issue through agreements such as exchanges; otherwise, order only a small quantity—even if there are significant promotional activities. Also, don't stop just because others have no-return clauses; mature products usually don't have many slow-moving problems.
Even in established markets, sales of new products can easily lead to large amounts of slow-moving inventory. This should be very clear, otherwise, you might be driven into a dead end by the supplier's regional manager's aggressive distribution plan—large-scale distribution, large-scale returns, outdated dates, and products piled up in the warehouse looking shabby, with no returns or exchanges. That would be disastrous.
**2** Cross-regional Selling (Diversion)
If cross-regional selling occurs in the market, how should it be handled? How quickly can the supplier respond? Case in point: a certain brand had large-scale cross-regional selling in the northwest and southwest regions, and the manufacturer simply ignored it. It would be strange if you could sell such products well.
**3** Out-of-stock Compensation
Out-of-stock situations mean that the sales target for the contract period may not be met, which will affect rebates at various stages. Therefore, it should be clearly defined in advance how the supplier will compensate for any form of out-of-stock.
**4** Price Protection
Clauses for handling cross-regional selling should be clear. Otherwise, you lose relative pricing power in your market, and all the effort you put into product promotion earlier will be in vain. If there are multiple distributors in a market, price protection clauses are essential. Generally, when cross-regional selling is caught, the manufacturer should step in to resolve it, with the cross-selling region buying back the products from the affected region at twice the price.
**5** Price Adjustment Notification
Price adjustments in the industry are usually increases, typically every two years. Two types of adjustments are particularly troublesome and have caused significant losses for some distributors.
One is a price decrease. This usually happens when a manufacturer sets a high price for a new product, but sales are poor, so they reposition and simply lower the price. As a result, your inventory and your downstream customers' inventory all depreciate. You haven't made money, but the losses are real, and since such products are usually not selling well, your losses are certain.
The other is a price increase followed by a decrease back to the original price. This usually happens when a manufacturer tries to raise prices for various reasons, but the increase fails because downstream customers don't accept it, forcing a return to the original price. This leads to the same losses as the first scenario.
Therefore, from the start, you should clarify with the supplier that price increases must be announced at least one month in advance. If a price increase occurs within one month, compensation should be provided.
**6** Damage Compensation
Some products are packaged in glass bottles or plastic bags, which are prone to damage. If there are liquids, the entire case can be contaminated, making it difficult to sell. Distributors' profit margins are not high, and generally, suppliers sign damage compensation agreements with logistics companies. So, if damage occurs, the handling procedure should be clear, as well as support for repackaging materials like cartons and bottle labels.
**7** Cost Bearing
Cost bearing should be clearly defined. For example, how various costs in the supermarket channel are borne, and how costs for stationed promotion and sales personnel are borne. Payment time, payment method, and compensation for overdue payment should be specified. Without written and clear cost support, you should consider it invalid.
**8** Sales Territory
Generally, suppliers have clear restrictions on the distributor's sales territory. What you need to do is to sign a sales territory that is slightly larger than your actual control area.
To ensure the supplier fulfills their promise, if conditions allow, you can also request initial stock on credit (floor stock).
**9** Sales Incentives
Clearly define the sales amount that triggers rebates, the rebate percentage, excess rewards, other sales incentive clauses, the form in which rewards are paid, and the time period for payment. If payment is overdue, how will compensation be made?
**10** Contract Duration
If the brand's influence is not strong locally, try to make the contract duration as long as possible, at least 2 years. Otherwise, you do the planting, but someone else reaps the harvest. If the brand influence is weak, the sales task is heavy, and you feel it's a bit challenging, and the contract period is only 1 year, such cooperation will not be pleasant.
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