Contracting, Negotiation, and Supplier Economics

Introduction

Inventory decisions are also contractual and financial decisions. A purchasing manager does not merely select a quoted unit price; the manager chooses a package of price, quality, lead time, payment terms, flexibility, risk allocation, and supplier capability. These choices determine both the total economic cost of supply and the amount of working capital tied up in inventory and accounts payable.

Supplier economics therefore requires an integrated perspective. A low price may be uneconomic if it requires a large minimum order, creates excessive obsolescence, or produces unreliable deliveries. Conversely, a higher unit price may be attractive when it supports smaller replenishment quantities, longer payment terms, superior service, or reduced operational risk.

This chapter examines pricing structures, payment terms, minimum orders, incentives, service-level agreements, auctions, negotiation strategy, contract risk, and working-capital implications. The focus is strategic: the objective is not simply to obtain concessions, but to design economically sound and governable supplier relationships.

Learning Objectives

By the end of this chapter, the reader should be able to:

1. Compare supplier offers using total cost rather than quoted price alone.
2. Analyze payment terms, minimum order quantities, discounts, rebates, and incentives.
3. Design and evaluate service-level agreements and performance remedies.
4. Select appropriate negotiation and sourcing methods, including auctions.
5. Identify contractual, operational, financial, legal, ethical, and supply risks.
6. Explain how purchasing terms affect inventory, cash conversion, and working capital.
7. Apply these concepts to a supplier-selection and contract-design problem.

1. The Economics of a Supplier Contract

A supplier contract is an economic governance mechanism. It specifies what will be exchanged, at what price, under which conditions, and with which consequences when performance deviates from expectations. It also determines who bears uncertainty concerning demand, input costs, quality failures, transportation, currency, regulatory change, and disruption.

The relevant analytical object is total cost of ownership (TCO), not invoice price. A general TCO expression is:

where:

• P = purchase expenditure;
• F = freight, duties, insurance, and handling costs;
• Q = quality-related costs, including inspection, defects, returns, and rework;
• I = inventory carrying and obsolescence costs;
• R = risk-related expected costs, such as disruption or non-compliance;
• A = administrative, transaction, and switching costs; and
• S = savings, credits, rebates, or other economic benefits.

The formula is a decision model rather than an accounting standard. Its components must be defined consistently, measured over the same time horizon, and adjusted to avoid double counting. For example, freight should not be included in both the quoted delivered price and F.

Relevant Cost and Opportunity Cost

A contract should be evaluated against the next-best alternative. Relevant costs are future, incremental costs that differ between alternatives. A sunk cost, such as a past tooling investment that cannot be recovered, should not determine a new award decision. However, switching costs that will actually be incurred in the future are relevant.

Opportunity cost is also important. A supplier’s apparently generous payment term may be less valuable if the buyer already has excess liquidity, whereas additional flexibility may be highly valuable for a firm facing volatile demand or constrained cash flow.

Contracting as Risk Allocation

Every contract allocates risks, whether explicitly or by silence. Important allocations include:

• price risk: who bears changes in commodity, energy, or labor costs;
• volume risk: whether the buyer guarantees quantities;
• demand risk: whether forecasts are binding or merely indicative;
• quality risk: responsibility for inspection, defects, recalls, and warranty claims;
• logistics risk: responsibility for freight, customs, loss, and delay;
• currency risk: the currency and mechanism for adjustment;
• continuity risk: obligations during disruption or force majeure; and
• compliance risk: responsibility for labor, environmental, data, and product requirements.

A sophisticated contract does not attempt to eliminate all risk. It assigns each risk to the party best able to control, absorb, insure, or price it.

2. Pricing Structures and Supplier Economics

Fixed, Variable, and Indexed Pricing

A fixed-price contract provides price certainty for a stated period. It is useful when costs are stable and the supplier can reasonably estimate its exposure. The supplier normally prices a risk premium into the offer, so fixed pricing may be expensive when input prices are expected to decline.

Variable pricing allows specified changes, such as monthly adjustment for a published steel or fuel index. An indexed price can be represented as:

where P_t is the price at time t, P₀ is the base price, M_t and M₀ are current and base material indices, L_t and L₀ are current and base labor indices, and w_m, w_l, and w_o are material, labor, and fixed-cost weights. The weights should sum to 1. The formula assumes that the selected indices are relevant, observable, and not easily manipulated. The contract should specify publication dates, caps, floors, review frequency, and treatment of index discontinuation.

Cost-plus pricing reimburses specified costs and adds a fee or margin. It may be appropriate for uncertain development work, but it weakens the buyer’s cost-control incentives unless audit rights, cost definitions, and incentive mechanisms are clear.

Volume Discounts and Price Breaks

A discount may be incremental or all-units. Under an incremental schedule, only units in each bracket receive the associated price. Under an all-units schedule, reaching a threshold may reduce the price on every unit. These structures have different marginal incentives and can create artificial demand, inventory inflation, and end-of-period buying.

The buyer should distinguish the nominal discount from its economic value. If a discount causes excess inventory, the carrying cost can eliminate the apparent saving. For a purchase quantity Q, annual demand D, unit cost C, and annual carrying-rate i, an approximate annual holding cost is:

This special-case formula assumes a constant replenishment cycle, instantaneous replenishment, stable demand, no safety stock, and no shortages. If safety stock or pipeline inventory is material, the relevant average inventory must include those quantities.

Total-Cost Price Comparison

Suppose Supplier A quotes 10,000 units at $8.00 each, with $0.40 freight per unit, a 2% defect rate, and payment in 30 days. Supplier B quotes $8.30, includes freight, has a 0.5% defect rate, and offers 60-day payment. If the cost of a defective unit is $12, the expected defect cost per unit is $0.24 for A and $0.06 for B. Before financing effects, the estimated economic cost is:

• A: $8.00 + $0.40 + $0.24 = $8.64 per usable-unit equivalent.
• B: $8.30 + $0.00 + $0.06 = $8.36 per usable-unit equivalent.

Supplier B is economically preferable on these assumptions, despite the higher quoted price. The comparison should additionally consider lead-time reliability, minimum order, switching cost, and the value of the additional 30 days of credit.

3. Payment Terms and Working Capital

Common terms include cash on delivery, payment 30 days after invoice, payment after acceptance, milestone payments, and consignment. Terms must be interpreted with attention to the invoice date, receipt date, acceptance date, and legal transfer of title.

Early-Payment Discounts

A term such as “2/10, net 30” offers a 2% discount if paid within 10 days; otherwise the full amount is due in 30 days. The approximate annualized cost of not taking the discount is:

where d is the discount rate, n is the discount period, and N is the final payment period. For 2/10, net 30:

(0.02 ÷ 0.98) × (365 ÷ 20) ≈ 37.2% per year.

This is an approximation based on a simple annualization and assumes the buyer can reliably pay on day 10. A buyer with available cash and no higher-return use for it should generally consider taking the discount. A cash-constrained firm must compare the discount benefit with the cost of borrowing and the liquidity value of retaining cash.

Cash Conversion and Inventory Financing

The cash conversion cycle can be expressed as:

where DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding. The identity assumes consistent definitions and average balances. Increasing payment days tends to reduce the cash conversion cycle, but aggressive extension may damage supplier stability or cause suppliers to increase prices.

For a business with annual cost of goods sold of $12 million, each additional day of payable time releases approximately:

$12,000,000 ÷ 365 ≈ $32,877

of cash, assuming purchases are evenly distributed and the change does not alter prices or supply continuity. This is a cash-flow approximation, not a guaranteed permanent financing benefit.

Payment terms interact with inventory terms. A 90-day payment period may appear attractive, but if it is paired with a large minimum order, the buyer may still experience a substantial cash requirement when payment eventually falls due. Consignment or vendor-managed inventory can reduce on-hand ownership, but they require accurate records, clear title provisions, insurance arrangements, and agreement about shrinkage and obsolescence.

4. Minimum Orders, Forecasts, and Flexibility

A minimum order quantity (MOQ) is the smallest quantity accepted per order, release, production run, or contract period. Suppliers use MOQs to recover setup costs, achieve production efficiency, or meet packaging constraints. Buyers face a trade-off between purchase economies and inventory exposure.

An MOQ is economically sensible when the incremental saving exceeds the incremental cost of holding, handling, financing, and potentially disposing of the additional inventory. Relevant costs include:

• average inventory created by the larger order;
• storage and insurance;
• deterioration and obsolescence;
• capital tied up until use or sale;
• demand uncertainty; and
• disposal or markdown risk.

Contractual flexibility can be designed through blanket orders, scheduled releases, quantity bands, postponement, supplier-held inventory, or option quantities. A forecast should state whether it is informational, a firm commitment, or a forecast with a tolerance band. Ambiguous forecasts create disputes and can unintentionally transfer demand risk to the weaker party.

A useful commercial design separates three quantities:

1. a firm near-term commitment;
2. a flexible forecast for capacity planning; and
3. an optional volume available at an agreed price and lead time.

This structure may cost more per unit than a rigid commitment, but it can reduce total risk for products with uncertain demand.

5. Incentives, Rebates, and Service-Level Agreements

Incentive Design

Incentives should reward outcomes that matter and that the supplier can influence. Appropriate measures may include accepted quality, on-time and in-full delivery, response time, cost reduction, engineering improvements, and verified sustainability performance.

A rebate can be expressed as:

where r is the contractual rebate rate. The contract must define eligible spend, exclusions, timing, credit-note treatment, tax treatment, and whether the rebate applies retrospectively to all purchases or only purchases above a threshold.

Poorly designed incentives produce gaming. For example, rewarding shipment date rather than customer receipt may encourage premature dispatch. Rewarding purchase volume may encourage the buyer to overstock. Rewarding defect percentages without defining the inspection population may encourage selective reporting.

Service-Level Agreements

An SLA converts service expectations into measurable obligations. A robust SLA specifies:

• service metric and definition;
• measurement method and data source;
• target and tolerance;
• measurement period;
• exclusions and force-majeure treatment;
• reporting and audit rights;
• corrective-action process; and
• remedies, credits, or termination rights.

Common metrics include on-time delivery, in-full delivery, order accuracy, fill rate, defect rate, mean response time, and recovery time. On-time-in-full performance may be calculated as:

The numerator and denominator must use the same order-level or line-level basis. A contract should specify whether partial shipments count as failures, how agreed date changes are treated, and whether the measurement is based on dispatch or receipt.

Service credits should be proportionate to economic harm. Excessive liquidated damages may be challenged as penalties in some legal systems, while weak remedies may have no behavioral effect. A buyer should also preserve practical remedies such as expedited replacement, recovery plans, alternate sourcing, and termination for repeated material failure.

6. Negotiation Strategy

Effective negotiation begins before the meeting. Preparation should include demand analysis, should-cost modeling, supplier capacity, market conditions, switching costs, alternatives, constraints, and the buyer’s best alternative to a negotiated agreement (BATNA). The supplier’s likely alternatives, or WATNA, should also be considered.

Negotiable Variables

Negotiation should address the entire value architecture, not only unit price. Variables include:

• price and indexation;
• volume and flexibility;
• lead time and capacity reservation;
• quality standards and inspection;
• payment and title terms;
• tooling and intellectual property;
• warranty and liability;
• data access and audit rights;
• sustainability and labor requirements;
• termination and transition assistance; and
• continuous-improvement commitments.

A package proposal can trade issues with different costs to each party. For example, the buyer may offer a longer forecast horizon in exchange for reduced MOQ, or earlier electronic payment in exchange for a lower price. Concessions should be conditional, reciprocal, and documented. Unconditional concessions invite the other party to treat them as the starting point for further demands.

Should-Cost Analysis

Should-cost analysis estimates what a product or service ought to cost under reasonable assumptions. A simplified structure is:

Should\ Cost = Material + Direct\ Labor + Conversion\ Overhead + Logistics + Reasonable\ Margin

The model is not an accusation that the supplier’s price is excessive. It is a basis for questions about cost drivers, productivity, scale, and risk. Analysts must avoid false precision, especially when supplier-specific process data are unavailable.

Ethical Negotiation

Negotiation must not involve collusion, bid leakage, discriminatory treatment, false claims, or coercive misuse of dependency. Procurement professionals should protect confidential information, disclose conflicts of interest, maintain auditable evaluation criteria, and avoid accepting gifts that could influence judgment. In public procurement, transparency and equal treatment may be legal requirements rather than merely good practice.

7. Auctions and Competitive Sourcing

An auction is appropriate when specifications are clear, suppliers are qualified, competition is sufficient, and price is a meaningful differentiator. Reverse auctions can be effective for standardized, high-volume goods with multiple capable suppliers.

They are less suitable when quality is difficult to observe, innovation is important, switching costs are high, supply is scarce, or suppliers must make relationship-specific investments. A low bid can be strategically unsustainable and may lead to quality deterioration, claims, or later renegotiation.

Auction design choices include open versus sealed bidding, ranking information, bid floors, lot structure, qualification requirements, and award rules. The award criterion should reflect total evaluated cost and non-price factors. A weighted score may be used:

where the normalized supplier scores are P_s, Q_s, D_s, and R_s, and the weights sum to 1. The scoring direction must be consistent: a higher score should always represent a better outcome. Weight selection should be justified before bids are observed.

8. Contract Risk and Governance

Contract risk extends beyond the signed document. Key risks include unclear specifications, unauthorized commitments, supplier insolvency, cyber incidents, counterfeit materials, sanctions violations, modern slavery, environmental non-compliance, dependency, and inadequate exit capability.

A risk-based contract should contain, where relevant:

• clear scope, specifications, and acceptance criteria;
• authority and change-control procedures;
• warranties, indemnities, and insurance;
• limitation-of-liability structure;
• confidentiality, data security, and intellectual-property provisions;
• audit, record retention, and compliance rights;
• business-continuity and disaster-recovery requirements;
• subcontracting controls;
• termination, step-in, and transition assistance; and
• governing law and dispute-resolution mechanisms.

Legal review cannot substitute for operational governance. The contract owner should monitor performance, review exceptions, verify invoices, maintain a risk register, and conduct periodic business reviews. Segregation of duties is essential: the person requesting a purchase should not unilaterally approve the supplier, receive the goods, and authorize payment.

9. Technology, Data, and AI

Digital procurement platforms can connect requisitions, contracts, purchase orders, receipts, invoices, supplier scores, and payment records. This supports spend visibility, compliance monitoring, and early detection of price or service deviations.

AI may assist with clause comparison, spend classification, anomaly detection, demand interpretation, and supplier-risk monitoring. Its outputs require human governance because training data may be incomplete, supplier information may be confidential, and automated recommendations may reproduce historical bias. An AI system should not autonomously alter contractual rights, reject suppliers, or disclose confidential bid information without authorization, auditability, and appropriate controls.

10. Illustrative Case: Northstar Components

Background

Northstar Components, an illustrative mid-sized manufacturer, buys 100,000 precision housings annually. Supplier A offers $18.00 per unit, a 5,000-unit MOQ, 30-day payment, 3% defects, and 92% OTIF. Supplier B offers $18.70, a 10,000-unit MOQ, 75-day payment, 1% defects, and 98% OTIF. Freight is $0.60 per unit for A and $0.30 for B. Each defective unit costs Northstar $10 in inspection, rework, and administration. Northstar’s annual carrying rate is 24%.

Problem

The purchasing team initially recommends A because its quoted price is lower. Operations argues for B because defects and late deliveries create production disruption. Finance emphasizes the value of B’s longer payment terms.

Analysis

Expected defect cost is $0.30 per unit for A and $0.10 for B. Adding freight and expected defect cost gives:

• A: $18.00 + $0.60 + $0.30 = $18.90.
• B: $18.70 + $0.30 + $0.10 = $19.10.

On this narrow measure, A is cheaper by $0.20. However, the additional average inventory exposure from B’s larger MOQ, relative to A, is approximately 2,500 units if replenishment is otherwise comparable. At a unit value of $18.70, the annual carrying cost of that incremental average inventory is:

2,500 × $18.70 × 0.24 = $11,220.

The cash-flow benefit of B’s additional 45 payable days on annual purchases of approximately $1.87 million is:

$1,870,000 × 45 ÷ 365 ≈ $230,548.

This is not pure profit: it represents financing value and depends on Northstar’s liquidity cost and the supplier’s willingness to sustain the terms. If Northstar’s marginal annual financing cost is 8%, the approximate annual financing benefit is:

$230,548 × 0.08 ≈ $18,444.

Northstar should also estimate the cost of late deliveries and production interruptions rather than assume that OTIF differences are either worthless or infinitely valuable.

Approach and Solution

Northstar conducts a negotiation based on a total-value package. It asks B to reduce the MOQ to 5,000 units, offers a two-year volume commitment, and proposes a quarterly service review. It asks A to improve quality, provide a corrective-action guarantee, and extend payment to 45 days. The final agreement selects B, conditional on a reduced MOQ, a defined OTIF SLA, defect remedies, transparent indexation, and a transition plan. A is retained as a qualified secondary source for disruption resilience.

Outcome

The decision does not follow the lowest initial quote. It follows a structured assessment of quality, freight, inventory, financing, continuity, and strategic risk. The dual-source arrangement has a higher administrative burden, but it reduces dependence and strengthens Northstar’s BATNA in future negotiations.

Learning Points

1. Price comparisons must use equivalent economic boundaries.
2. Payment terms have value but do not eliminate inventory risk.
3. Service reliability should be measured and contracted.
4. Negotiation can exchange commitments, flexibility, and information rather than focus only on price.
5. Resilience may justify maintaining a qualified alternative supplier.

Challenges and Limitations

Supplier economics is affected by uncertain demand, imperfect information, changing exchange rates, regulatory requirements, and behavioral responses. TCO models can create spurious precision when risk estimates are weak. Weighted scoring can conceal subjective judgments behind numerical values. Auctions can damage innovation and supplier relationships. Longer payment terms can transfer financial stress to smaller suppliers and ultimately reduce supply resilience. SLAs can encourage local optimization if metrics are poorly selected.

Managers should therefore use sensitivity analysis. Test how the decision changes under different defect rates, demand volumes, exchange rates, disruption probabilities, and financing costs. Important assumptions should be documented, reviewed, and assigned to accountable owners.

Best-Practice Checklist

• Define the business requirement before soliciting price.
• Compare suppliers on TCO and risk-adjusted value.
• Separate firm commitments from forecasts and options.
• Define MOQs, releases, flexibility, and obsolescence responsibility.
• Align payment terms with liquidity, supplier health, and discount economics.
• Use measurable, auditable SLAs with proportionate remedies.
• Prepare a BATNA, should-cost model, and negotiation mandate.
• Use auctions only where specifications and competition support them.
• Include continuity, cybersecurity, ethical sourcing, and exit provisions.
• Monitor the contract after award; signature is the beginning of governance.

Chapter Summary

Contracting and negotiation determine much more than the invoice price of inventory. A sound supplier decision evaluates total cost of ownership, relevant and opportunity costs, quality, logistics, service, flexibility, risk, and financing effects. Fixed, indexed, variable, and cost-plus pricing allocate uncertainty differently. Discounts and rebates must be evaluated against inventory and cash consequences, while minimum orders should be balanced against carrying and obsolescence risk.

Payment terms influence the cash conversion cycle, but aggressive extension may weaken suppliers or increase prices. SLAs translate service expectations into measurable performance and remedies. Negotiation is strongest when based on BATNA analysis, should-cost reasoning, conditional concessions, and a package of economic variables. Auctions are powerful for standardized competitive categories but inappropriate when innovation, quality observability, or relationship-specific investment is central.

Finally, contracts require continuing governance. Risk registers, audits, ethical safeguards, business-continuity provisions, data controls, and performance reviews connect contractual language with operational reality. The strategic objective is a resilient, economically rational, and mutually enforceable supply relationship.

Key Terms

Total cost of ownership: The full economic cost of acquiring, using, supporting, and disposing of a purchased good or service.

Relevant cost: A future incremental cost that differs among decision alternatives.

Fixed-price contract: An agreement in which price remains fixed for a specified period or scope.

Indexed pricing: Pricing adjusted according to a defined external index or formula.

Cost-plus contract: An agreement reimbursing specified costs plus a fee or margin.

Minimum order quantity: The smallest quantity a supplier will accept for an order or release.

Blanket order: A purchasing agreement authorizing repeated releases under agreed terms.

Payment term: The contractual period and conditions governing payment to a supplier.

Early-payment discount: A reduction in invoice value for payment before the normal due date.

Cash conversion cycle: The period during which operating cash is invested before being recovered.

Rebate: A retrospective or periodic credit based on eligible purchases or performance.

Service-level agreement: A contract section defining measurable service obligations and remedies.

OTIF: On-time-in-full delivery performance.

BATNA: Best alternative to a negotiated agreement.

Should-cost analysis: An estimate of economically reasonable cost based on cost drivers and assumptions.

Reverse auction: A competitive event in which suppliers submit progressively more favorable offers to a buyer.

Risk allocation: Assignment of uncertainty and consequences among contracting parties.

Force majeure: A contractual mechanism addressing extraordinary events beyond a party’s reasonable control.

Consignment inventory: Inventory held at or for the buyer but owned by the supplier until an agreed triggering event.

Working capital: Short-term operating resources tied up in receivables, inventory, and payables.

Review Questions

Short Answer Questions

1. Why is total cost of ownership generally more informative than quoted unit price?
2. What is the difference between an incremental and an all-units volume discount?
3. Define a minimum order quantity and identify two economic risks it creates for a buyer.
4. What information should an effective service-level agreement specify?
5. Explain how an increase in days payable outstanding affects the cash conversion cycle.

Long Answer Questions

1. Compare fixed-price, indexed-price, and cost-plus contracts. Discuss the circumstances in which each may be appropriate.
2. Explain how a buyer should evaluate early-payment discounts when liquidity is constrained.
3. Discuss the advantages and limitations of reverse auctions in strategic procurement.
4. Explain how contractual terms allocate price, demand, quality, and continuity risk.
5. Develop a negotiation preparation framework for a buyer entering a strategically important supplier negotiation.

Analytical / Application Questions

1. A supplier offers a 4% discount if the buyer increases its order from 4,000 to 10,000 units. Identify the data needed to determine whether the discount is economically beneficial, and construct the relevant comparison.
2. A supplier has 96% OTIF performance based on shipment date, while the buyer requires 95% OTIF based on receipt date. Explain why the two measures may produce different results and design a contract definition that reduces ambiguity.
3. A financially constrained firm is offered either a lower price with payment in 15 days or a higher price with payment in 75 days. Develop a decision analysis incorporating financing cost, inventory exposure, supplier risk, and operational continuity.

Multiple Choice Questions with Answers

Question 1

Which measure best captures the economic comparison of supplier offers?

A. Quoted unit price only

B. Total cost of ownership

C. Supplier revenue

D. Annual purchase volume

Correct Answer: B. Total cost of ownership

Question 2

Under terms 2/10, net 30, the buyer receives the discount when payment is made by which day?

A. Day 2

B. Day 10

C. Day 20

D. Day 30

Correct Answer: B. Day 10

Question 3

Which contract structure most directly links price changes to an observable external cost measure?

A. Fixed-price contract

B. Indexed pricing

C. Unspecified forecast

D. Consignment agreement

Correct Answer: B. Indexed pricing

Question 4

If annual cost of goods sold is $3,650,000, the approximate cash released by increasing days payable outstanding by 10 days is:

A. $1,000

B. $10,000

C. $100,000

D. $365,000

Correct Answer: C. $100,000

Question 5

Which item is essential for an effective service-level agreement?

A. An undefined quality aspiration

B. A measurable metric and measurement method

C. A prohibition on all supplier communication

D. A guarantee that demand will never change

Correct Answer: B. A measurable metric and measurement method

Question 6

A reverse auction is generally most appropriate when:

A. Specifications are clear and several qualified suppliers compete

B. Innovation is impossible to evaluate

C. Only one supplier exists

D. The buyer requires a unique research partnership

Correct Answer: A. Specifications are clear and several qualified suppliers compete

Question 7

What is the primary purpose of a BATNA in negotiation?

A. To calculate warehouse capacity

B. To identify the best alternative if agreement is not reached

C. To determine the supplier’s tax rate

D. To eliminate the need for preparation

Correct Answer: B. To identify the best alternative if agreement is not reached

Question 8

Which statement about a minimum order quantity is correct?

A. It always reduces total cost

B. It can increase carrying and obsolescence risk

C. It eliminates demand uncertainty

D. It guarantees on-time delivery

Correct Answer: B. It can increase carrying and obsolescence risk

Question 9

In the cash conversion cycle equation, increasing days payable outstanding generally:

A. Increases the cycle

B. Reduces the cycle

C. Has no possible effect

D. Equals days sales outstanding

Correct Answer: B. Reduces the cycle

Question 10

Why can a low auction bid be strategically undesirable?

A. It may be associated with unsustainable pricing, quality problems, or later claims

B. It always increases supplier innovation

C. It eliminates contract risk

D. It guarantees supplier profitability

Correct Answer: A. It may be associated with unsustainable pricing, quality problems, or later claims