Production Agreements of a Supply Chain; The Other End of the Rainbow
Many years ago I was pulled away from my usual assignments to do a major product production tolling agreement between two of America’s larger food companies. It was a stroke of luck for me because it provided something new for my interest in multivariate risks management. Since then I have prepared many multivariate high risk agreements, and it is always an enjoyable as well as remunerative adventure. When you think of every brand as a franchise in itself, it fits perfectly into my customary practice of managing franchise relationship disconnect issues.
These agreements include, in terms of common risks to be accounted for, not only product tolling agreements, but requirement agreements, output agreements and any other variable protocol. The risks include comparative law analysis, passage of title and risk of loss, taxation, selection of methods of production and of transportation, customs issues, yields, quality control and compliance with standards and customs of the trades, labor matters, insurance, dispute resolution, official and comparative languages, currency fluctuations, payment terms, competent tender and refusal to accept, rights of inspection (where, when, how and by whom), disposition of unaccepted product, as well as other idiosyncratic issues that would not be predictable were you not working closely with people intimately familiar with the business.
Perhaps one fine day groups of franchisees who have taken control over the management of their own supply chain will make arrangements with outstanding producers of “identity”/ franchise products and begin to use their access to more exclusive product sourcing to differentiate their franchise systems to another level of customer loyalty. To be sure, they would have to be of sufficient scale to enable them to take substantially all of the output of a special product producer in order to maintain that exclusivity and insist upon their own quality standards, or the product would surely find its way into the systems of their competitors. Arrangements that do not account for output of the producer are generally referred to as private label agreements. They involve customer provided specifications and formulae at one end of the spectrum all the way to just having a special brand identity on the containers of the same products normally produced under the producer’s brand or the brands of other major customers.
Whether you are committing for the total output or not determines the limits of negotiation control you have. The rest of that capacity is going to go somewhere, and that fact needs to be dealt with in your agreement. Many times rather absurd provisions are insisted upon for reasons of appearance, and of course they don’t work. Many American companies are learning that the hard way in their dealings with Chinese and other Asian factories. Once they complete your orders they go on to produce duplicates for distribution in your markets in competition with you. They are often of rather shabby quality and the marketing techniques include the misappropriation of your trade identity to pass them off as your genuine products.
Most people think of the other end of the supply chain, where the product meets the retail shelf and how much it cost to put it there and the risks of that moment vis-à-vis expectations of price point realizations and the march of competition. That is where I have spent most of my time considering the impact that supply chain management/mismanagement has so drastically had upon the success potential of franchising and upon the flood of knock off infringing products sold as the genuine articles. Since Asian companies arise and disappear like underground secret operations, suing them one at a time is playing whackamole rather than meaningful enforcement of I P or other contract rights. These companies set up web sites that look and behave as though they were regular respected suppliers to your customers at seriously discounted prices. The noise level of the outrage is deafening. While the U S government will try to provide assistance, as soon as you shut down one website another springs up in its place.
Recently I have been able to enjoy some of my more esoteric interests. The notoriety of product purity fraud in the extra virgin olive oil business has stimulated my interest intensely. I love good olive oil to a degree that borders upon religion, much as I experience when I contemplate good wine that has similarly been the subject of quality misrepresentation fraud over the years. I believe that I have just discovered a small recently established vintner who is at present more a negotiant eleveur as that term is understood in the Burgundian wine trade, except that he is in California. His products are so good that he will no doubt become noticed at a larger level and I shall have to pay more for his really delicious wines.
If one were of a mind to establish a support relationship with him at this stage, much as one might take a new very fine artist and support him with patronage, their future could include the establishment of a new “house” in the sense of an economic “house” that succeeds in making that brand an incredible success. Fortunately for him, if he continues in the manner of his current practices, I have no doubt he will get there on his own. In the meantime I feel blessed that I have come across him at this stage of his professional life. I know of two such people within the past few years, the other being somewhat farther along in the successful development of his imprimatur and more actual vintner than negotiant eleveur. Both are from the same general area of central California.
I think that I probably consume good olive oil at the level of a Greek and my wine enjoyment is possibly unmatched by any known civilization.
Earlier this year Tom Mueller’s book about olive oil EXTRA VIRGINITY depicts the degree of hardship that olive oil producers are facing in the current economic difficulties and the “blending” that has become rampant to enable what is labeled Extra Virgin Olive Oil to be sold profitability. What is blended into it is often not even olive oil. What most Americans buy as EVOO isn’t, to make a long story short. Inasmuch as good wine also enjoys the presumptuousness of highly specific imprimatur, especially in France and, to a somewhat similar degree elsewhere in Europe, one might well expect that the snooty who insist upon their nomenclature prerogatives would, when put to it, lie cheat and steal to keep the black ink flowing on their financial statements. An excellent history of just such fraudulent practices amongst the practitioners of Bordeaux wine snobbery can be found in Nicolas Faith’s book THE WINEMASTERS published in 1978.
Humorously, in the matter of things Bordelaise, in 1972 two vineyards that lie just across a path from each other did not enjoy the same pedigree. Lafitte Rothschild was designated a first growth. Across the path Mouton Rothschild was designated a second growth. There are some who claim they can taste the difference. They are not telling the truth. The jokes about this are legion.
In any event, in 1973 Mouton Rothschild was redesignated a first growth, with all sorts of financial implications that need not be pursued here. M le Baron Rothschild retained Pablo Picasso to do the label for the 1973 Mouton. It says “Premier je suis. Second je fut. Mouton ne change”.
As a specialist in investment fraud, these product histories were compelling to me. I am now eating the world’s most incredible and unquestionably pure EVOO, and every meal is almost a religious ritual. Olive oil is something with soul. You consume it with such incredible gratitude. I long ago gave up on European wines, with occasional ventures back there when the auguries compel it. California and the American Pacific Northwest is to me the world’s most fantastic wine producing area. America is working on it but has yet to arrive when it comes to top quality and taste olive oil.
What brings me to write this article is my interest in being able to negotiate and prepare the enabling agreements that bring together great marketing companies in America with the best producers of great EVOO and of good to great wines so that the myriad risks of managing the relationship from horticulture to delivery are accounted for. This is a wonderful exercise in multivariate risk management.
I was browsing in a new Whole Foods Market in Houston last Sunday, sitting at their new wine bar placed next to the olive oil shelves. A rather nice looking woman was looking rather lost as she tried to determine which bottle of olive oil to select. I walked the few steps over to her and pointed to the Lapas olive oil. She asked why I suggested that and I explained to her that it was from a reliable producer and told her that it was a house brand for Whole Foods Company, one of the very few trustworthy house brands in the world olive oil trade and completely organic. She smiled and took the Lapas bottle as her selection.
Whole Foods Company had to have carefully researched this project. Contracting for a single source agricultural product in a distant and troubled economy is high risk to say the least. I know what terms the agreement has to include, and I wondered how each of the contract risks in the Whole Foods - Blauel Group agreement are dealt with.
Fritz Blauel is an Austrian who went to Greece in the 1970s and became interested in olive oil production and cultivation in the Peloponnesus and Kalamata in particular. The Greeks of that area were still using rather ancient methods, and he sought to influence the producers of the area in totally organic methods. To make a long story short, he succeeded, and Whole Foods Company’s house brand of really top grade olive oil (not their 360 brand), Lapas, comes entirely from Blauel’s operation. He produces about 650 tons of organic top grade olive oil each year within his group of farmers, and it may be found also under the brands Mani Organic and Kalamata Gold.
What does one think of when contemplating the establishment of such a relationship, beyond the market research and the position of the brand as a “fit” within one’s business? For the lawyer crafting the seminal protocol it is a wonderful challenge. It requires input from several specialists who will probably be found within the client company or be on retainer for the client company. In the matter of food and agricultural products, those would include not just the market research folks but also the agronomists, food chemists, manufacturing technique specialists, those in transportation and delivery as well as the financial staff.
The issues, especially in the instance of purchasing foreign agricultural output from a single producer or single group of producers include the management of the entire punch list of risks that you saw a bit earlier in this article. When you have accounted for absolutely everything you and the group can think of you have to start playing “what if…” games. The what if games should continue throughout the process of building the relationship and the agreement, right up to the moment of signatures. Even then you can be assured that there are contingencies you missed. When that jumps up and stares you in the face you have to rely for relief upon the credibility and trust you were able to build up during the relationship right up to the moment when the event arises, and your approach to dealing with it must be obviously fair for it to be successful.
By way of illustration, a client lost total supply from a sole source vendor for a whole product line because someone served a subpoena on the vendor without handling the diplomacy properly. The vendor was in Iceland and it required a several day long “social event” with its Vikingesque CEO just to get talks started on the real problem. It took a few weeks to recover from the “social event”. You simply cannot think of everything.
Particularly in the instance of olive oil being produced at an exceptionally high level of quality within one of the most troubled economies on the planet where no one feels secure, just the notion that minute controls can be expressed in a single writing seems farfetched. The cultural and economic divides standing alone would be insurmountable without bringing into acute focus many talents and skills in common easy to read and effective ways. The resulting economic engine microcosmically and with mutual compassion and grace generates profitable product integrity without sacrificing the art or the nuances of timeless beauty encapsulated within a sacred tree fruit. We are speaking of olive oil, sacred, healthful and delicious.
Commercial lawyers rarely get to work on a symphony of nuances that embrace a fundamental expression of an entire culture. Smoothing the contrapuntal rhythms into a composed useful protocol calls upon artistry of expression as it seems to seek a trivializing of the ephemeral, a capturing of spirituality. This is an example of the grace notes of law practice. It comes to very few. What must be produced is a reliable encapsulation of many inherently indefinite forces that are answerable in the normal course to the uncertainties of agricultural crops and worked on by farmers and associated trades as well as social and political upheaval. At many points along the lines potential leakage can occur if care and sensitivity are not brought to bear. Investing in great things is not to be approached without the willingness to support a work of very fine art as well as a mundane agricultural food product. Doing that with an eye upon effective economics is rather breathtaking. If you are already in this business as you read this you understand the nuances and risks. This is way beyond law school final exam stuff.
This could easily develop into a lengthy and even more boring article. I don’t want to go there. But I hope to convey a real feeling for the uncertainties and their possible impact.
I really enjoy this kind of work because I find myself working with extremely competent committed people who take an almost worshipful approach to the products. Whenever I get such an assignment it is a call to celebration and wall to wall happy in addition to remunerative. Professional life doesn’t get much better than that.