Con­tract design in sup­p­ly chains in times of crisis

The­re is no end to the pro­blem of dis­rupt­ed sup­p­ly chains. Whe­ther it’s the chip cri­sis, the COVID-19 pan­de­mic, or increased raw mate­ri­al pri­ces – they are all taking their toll throug­hout the sup­p­ly chain. The fact that auto­mo­ti­ve sup­pli­ers are par­ti­cu­lar­ly at risk in this respect is shown by a recent­ly published fore­cast on the share of small and medium-sized enter­pri­ses in Ger­ma­ny at risk of insol­ven­cy by sec­tor 2022–2025 (only in Ger­man), which does not give auto­mo­ti­ve sup­pli­ers a good report card.

Initi­al situation

The reasons for sup­p­ly chain dis­rup­ti­ons are com­plex. One cau­se is the COVID-19 pan­de­mic. Plant and port clo­sures are impe­ding pro­duc­tion and trans­por­ta­ti­on. Cur­rent events such as the blo­cka­de of the Suez Canal rein­force this effect. In par­al­lel, the demand for cer­tain mate­ri­als and raw mate­ri­als (e.g. semi­con­duc­tors and micro­chips) is incre­asing. Avai­la­bi­li­ty on the mar­ket is low, and pri­ces are cor­re­spon­din­gly high.

The­se dis­rup­ti­ons are par­ti­cu­lar­ly noti­ceable in the auto­mo­ti­ve indus­try. Based on the dif­fe­rent posi­tio­ning of the play­ers within the sup­p­ly chains, in the vast majo­ri­ty of cases the­se dis­rup­ti­ons are not at the expen­se of the OEMs, but of their sup­pli­ers. Exis­ting con­trac­tu­al arran­ge­ments bet­ween OEMs and sup­pli­ers rein­force this effect. Inde­ed, the often strong nego­tia­ting posi­ti­on of OEMs means that the dis­tri­bu­ti­on of risks rela­ted to dis­rup­ti­ons and inci­dents is sti­pu­la­ted within the frame­work of num­e­rous con­tracts bet­ween OEMs and their sup­pli­ers, to the detri­ment of the lat­ter. This is one of the reasons why OEMs are able to turn a pro­fit despi­te the ten­se situa­ti­on, while small and medium-sized auto­mo­ti­ve sup­pli­ers in par­ti­cu­lar are on the losing side.

What now?

An impro­ve­ment in this situa­ti­on for sup­pli­ers can be achie­ved, quite fun­da­men­tal­ly, through careful and forward-looking con­tract design. The agree­ment of self-supply reser­va­ti­on clau­ses and mate­ri­al pri­ce escala­ti­on clau­ses are just two examp­les, agree­ment on devia­ti­ons in order volu­mes and lead times and the asso­cia­ted pri­ce adjus­t­ments a third, and shorter pri­ce com­mit­ment peri­ods a fourth.

Howe­ver, the way the par­ties deal with each other will also have to chan­ge: Sup­pli­ers must posi­ti­on them­sel­ves more stron­gly and cle­ar­ly name and address dis­ad­van­ta­ges in their sand­wich posi­ti­on. This can also lead to OEMs or hig­her tiers having to be more invol­ved in tri­an­gu­lar rela­ti­onships with sub-suppliers.

Sum­ma­ry

The cur­rent deve­lo­p­ment again shows how important it is for sup­pli­ers to assess com­mer­cial as well as legal risks befo­re ente­ring into busi­ness rela­ti­onships and to take coun­ter­me­a­su­res. Con­tract design is an effec­ti­ve means of achie­ving this. Exis­ting con­tracts should the­r­e­fo­re be review­ed to enable risk assess­ment and to initia­te nego­tia­ti­ons with cus­to­mers and sup­pli­ers in a cor­re­spon­din­gly well-prepared man­ner. Future con­tracts should be nego­tia­ted in such a way that risks are mini­mi­sed as far as pos­si­ble right from the start.

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