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A Better Partnership

Ahead of the Curve Auto Supplier Blog

December 05, 2012

Stuck in the Middle?

As a supplier in a tiered supply relationship, you should always consider where you stand in the grand scheme of things.  One simple way to do this is by thinking about whether your obligations to your customers align with your suppliers’ obligations to you.  In other words, whether you are a potential "STUCKEE." Many Tier 1s and directed Tier 2s are contractually obligated to supply for the “life-of-the program” or some defined long-term period with their customers. The same suppliers may be buying material, parts or services for the same programs under purchasing agreements with Tier 3s and Tier 4s that do not align with these long-term commitments. So, what happens when the two- or three-year contract with the Tier 3 or Tier 4 expires?  You are potentially STUCK, at the mercy of your suppliers, over new pricing or other issues (i.e., volume) with no real option to resource.  As all suppliers in this industry know, PPAPing a new source mid-production is not favorably looked upon or always agreed to by OEMs.    So what's the solution?  Your sales team needs to work with your  purchasing team to make sure you negotiate terms with your suppliers that align with your commitments to your customers.  This assures that in the grand scheme of things, you are not stuck in the middle with your customer forcing you to supply on one end and your suppliers making unreasonable demands on the other end. And, you must also make sure that if you are getting into a long-term relationship, you leave a way out for yourself.  Most of your OEM and Tier 1 customers likely have favorable termination clauses that allow them to leave when they need to or when it fits their needs.  If you  negotiate “life-of-the program” commitments from your suppliers, you should also include a similarly favorable cancellation clause, such as a "cancellation for convenience" clause.  This allows you to align your terms with your customer’s terms for the way out of the program so that you are not the one stuck in the middle with your customers gone and your suppliers still supplying.

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