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Ahead of the Curve Auto Supplier Blog

August 25, 2016

Contract Exit Strategies You Never Knew You Had

Perhaps you weren’t able to negotiate a raw material adjustment mechanism and, as luck would have it, a natural disaster causes an unexpected shortage of raw materials and prices go through the roof. Or, maybe you began supplying without fussing over the contract’s capacity obligations because you were just looking to fill your capacity and then, just a few years later, volumes skyrocket and now you’re paying overtime and expedited shipping just to keep up.  Maybe it’s just the opposite – volumes aren’t materializing as estimated and you’re passing up other opportunities to fill your capacity because it’s already committed.

Whatever the details, chances are that you’ve had a supply relationship turn from a winner to a loser that you wish you could dump. It’s frustrating, to say the least. But before you resign yourself to just living with an undesirable supply relationship or, in some cases, to being forced entirely out of business because you’re losing that much money, consider what options you may have to exit that relationship or to renegotiate the contract.

Options? Yes, you read that correctly. While you may believe that you’re stuck with a losing deal, you may not be. A deeper dive into your documents may reveal that the quantity and/or duration terms (or lack thereof) may create the opportunity for you to make your escape.  

Though you might assume that you’re obligated to fulfill your customer’s “requirements” for the life of the program, because you’ve quoted based on the customer’s estimated yearly requirements, you may just have a blanket purchase order that is subject to releases rather than a “requirements contract.” If that’s the case, each release is a separate contract. So, once you’ve filled the last accepted release, you may be able to reject future releases, or, more likely, request a new price or other terms before accepting another release. Or maybe your contract lacks an appropriate duration term, allowing you to terminate it upon reasonable notice (i.e. just enough time for your customer to find a new supplier) rather than stick it out for years.

Of course, determining whether you are obligated to continue with a losing contract is not a simple analysis and can have major ramifications on your customer relationships and reputation within the industry. Be sure to reach out to an experienced automotive supply chain attorney to guide you and your business team through your options.

To learn more about this topic, read my article, “Trapped in an Unprofitable Contract? Maybe Not: Exit Strategies You Never Knew You Had,” on page seven of the latest OESA Quarterly Newsletter or contact me directly at 248.784.5025 or jpatel@wnj.com.

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