A Preferred Supplier Agreement, or PSA, is an agreement entered into by a company and one of their third party suppliers.
This agreement is usually formalised with a contract and defines the relationship between the two parties, usually for the purpose of the parties to work closely together on an ongoing basis under certain conditions that benefit both parties. A PSA is usually instigated by the company that nominates one of their suppliers to work closely with in order to obtain certain good or services, as they feel that that supplier is the best one to obtain them from.
In committing to a PSA, a company usually forgoes working with alternative suppliers in direct competition with the supplier for the PSA, which is beneficial for the supplier. In exchange for this, the supplier usually offers their goods or services to the company they have entered into a PSA with at a discounted rate, or provides them under some preferential conditions.
Preferred Supplier Agreements have terms built into the contract of when the agreement will come to an end and be reassessed.
This often incentivizes the supplier to keep up a high quality of service to the company. If a company elects not to renew their PSA with their supplier, this creates opportunities for other suppliers to pitch for the business of the company.