Two approaches to sourcing auto parts

Two approaches to sourcing auto parts | The Operations Room.

Here is an article about contract terms sourcing auto parts.  Changes in contract terms with suppliers may make all the difference, and creates a game suppliers and manufacturers can play.  As is pointed out, GM requiring suppliers to bear the cost of recalls involving their parts indicates bargaining strength, but could result in suppliers forming shell companies for individual lines, which could declare bankruptcy and avoid liability if a defect related to their part caused GM to kick in the clause.  that’s too easy to do.

That is how the ocean shipping business operates; each ship is its own corporation, and if there is a disaster at sea causing cargo or environmental damage, the individual ship company just goes bankrupt, and the creditors are holding the empty bag.  You can say they have the ship for security, but ships depreciate form day 1, and have only a 20 year lifetime at best. Tthey also obsolesce relatively fast, both from technical improvements, and because they need expensive major overhauls every 5 years by international law.

We have also seen this in the custom home building space, where individual contractors incorporate to build a home, and when liability for some problem ensues they just liquidate it and disappear.  For small suppliers, reputation may not matter so much, especially if they have very specialized skills that allow them to reopen under a new corporate shell, and may or may not go for GM business again– but there are more auto makers who need their services.  Same for home builders. Often they move to another location and start again.

If the skills are high enough valued, reputation for the skill may outweigh reputation for business dealings.  Ocean shippers have worked this out.