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Whose fault is it, anyway? Industry 4.0 and its profound effect on supply contracts

Whose fault is it, anyway? Industry 4.0 and its profound effect on supply contracts

  • United Kingdom
  • Diversified industrials

27-04-2018

Disruptive technology is having a profound effect on the diversified industrial supply chain – and this is only the beginning. It’s predicted that we will see more disruption in the industrial space in the next five years than we have in the last 20*, making it harder for the bigger players to quickly adapt their business models – leaving once unchartered territory open for SMEs.

No matter the size, industrial suppliers have got to work together more effectively if they are to survive the fourth industrial revolution (industry 4.0). This means not looking at their own products in isolation, but rather how they can connect with their competitors. This will be new to a lot of enterprises that were historically competing with each other for orders, as they are now going to have to think about how they share information, data and intellectual property, without it having a negative impact on their own business. In the instance of a failure, the biggest question on the minds of a lot of our clients is who is liable for what; where hardware and software are intrinsically linked.

How do industrial suppliers overcome this?

Suppliers to Original Equipment Manufacturers (OEMs) need to address what the consequences are if their particular part is connected and where the liabilities fall. They will need to protect themselves in a supply contract, which is easier said than done. Should a problem arise, the OEM needs to have clear acceptance, one way or another, of liability.

What can OEMs do?

OEMs must recognise that the dynamics of the supply chain are shifting, and what once may have been relatively clear cut in terms of liability, is now much more complex. One way to combat this would be for OEMs to consider liability sharing agreements, which, historically, is not something manufacturers have needed to do. This will require a lot more negotiation, including renegotiation of existing long term contracts between OEMs and their supply chain.

The impact

Our industrial team has seen a number of suppliers revisiting their terms and conditions and are seeking advice on the implications of connectivity on their existing contracts.

We are also seeing a number of suppliers revisiting their product liability insurance arrangements. Policies which once only had to cover product liability are increasingly having to evolve to cover professional indemnity, as more and more industrials are incorporating software into their products. This shift in focus has led many suppliers now to be providers of a service, whereas historically, they were simply providing hard goods.

In the corporate space, we are seeing a growing number of formal arrangements between historically competing companies, particularly by way of joint ventures (JVs). We are also seeing instances of OEMs entering into JVs with smaller suppliers to reduce the risks associated with entering a new market. It also gives the OEM greater control on output, and lowers the risk of the product not making it to market for financial reasons.

It’s clear that industry 4.0 will provide more challenges for suppliers as further disruptions enter the market, but industrial suppliers must work with each other to overcome them, and OEMs must be open to sharing liability in order for their suppliers to thrive: those that work in isolation or fail to adapt will undoubtedly fall behind.

To follow the industrial revolution journey through the history of our clients, visit our Industrial Revolution Through The Ages Timeline.

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