I had the opportunity to present in the Warner panel for OESA’s West Michigan Regional Supplier’s meeting in December. We spoke about how best to manage supply chain risk in light of certain industry trends heading into 2017. In our discussion, we addressed the increased frequency of many OEMs pursuing cost recovery actions against the supplier base for their elevated recall and warranty costs in 2016 as well as the OEMs increased reliance on suppliers for technological innovation and design. With tech collaboration only expected to increase, suppliers are expected to take on greater warranty exposure – and face more cost recovery actions – in 2017.
With these trends in mind, here are three key takeaways for suppliers to keep in mind heading into 2017:
- Put proper protections in place for your intellectual property. This includes applying for the appropriate patents and requiring the customer to sign your non-disclosure agreement before any proprietary rights are shared. It can also come in the form of having to negotiate an agreement separate from your primary supply contract to preserve such rights and to limit your customer’s license to use your technology. And, if collaborating on particular technology, a thorough joint development agreement is critical to protect any rights you expect to leave that collaboration with. Technology rights are not only valuable company assets, but, they often give you – as the supplier owning those rights – the leverage necessary to secure favorable supply terms. That may include terms placing caps on or carving out exclusions for your potential warranty, recall, or indemnity liability. In some instances, when your protected technology is strongly desired by the upstream buyer(s), you may have the leverage to negotiate terms more favorable to you – be it more limited warranty and remedy requirements or more favorable commercial terms.
- Look at more than just the warranty, limitations of liability and indemnity terms when evaluating and trying to limit your warranty exposure under any supply agreement. An often overlooked term is the offset provision. An upstream supplier’s right to offset – or debit against what that supplier owes you – is a very strong mechanism to recover warranty costs. Buyers often abuse any perceived offset rights to force liability down the supply chain even when it is unclear whether a cost recovery is appropriate or not. Placing clear limits on your buyer’s offset rights can be a very effective means of limiting your warranty or recall exposure. Setting the appropriate price term can also be important. In addition to accounting for other factors outside of your control (currency exchange rates, raw material price fluctuations, lower than expected volumes), you should set your price to account for potential warranty claim costs. Procurement, finance, engineering and legal must work together to accurately evaluate your exposure and to determine how such costs can be included in a competitive product price. Your engineers are best suited to evaluate the scope of any risks. Finance and procurement, in turn, will be in the best position to determine warranty costs and competitive pricing. And, legal can negotiate a supply agreement consistent with the other departments expected scope of potential warranty liability. That includes not only clearly identifying who has design responsibility for the product being supplied, but also incorporates any expected limitations or exclusions to any warranty offering.
Create a written plan addressing your course of action in the event of a warranty spike or product recall. Such plans will help you to identify and mobilize your team for the best response if such an event occurs. Typically, the team will be responsible for, among other things:
- Maintaining up-to-date emergency contacts at suppliers and customers;
- Proactively monitoring and, if necessary, investigating field complaints;
- Establishing a single point of contact for all warranty-related communications, including any inquiries from media or government agencies;
- Making sure key warranty and safety related records are immediately ready; and
- Periodically simulating a warranty event requiring product removal.
Such preparations can be critical to providing a timely response to any field complaints and to complying with NHTSA’s unforgiving reporting deadlines for any safety related issues.
I hope you keep these three takeaways in mind as you plan and prepare for 2017. I also encourage you to attend OESA’s February 2, 2017, meeting where Warner will continue its discussions with OESA members on the expected trends that auto suppliers should be prepared for in 2017. For more details and to register, click here. Hope to see you there.