Managing lower tier subcontractor risk in Contracts.

Just as suppliers can impact your supply chain, their subcontractors can also impact your supply chain. How do you manage that risk?

The first step in the process is supplier qualification which means not just qualifying the supplier but also looking at the subcontractors they use. Consider those subcontractors based upon their criticality, whether the supplier has alternative sources, and how much spend you the do with them. This should help identify how much risk there is. The more difficult,costly or longer time it would take to switch suppliers, the greater the potential risk, Consider that in your sourcing and award decisions.

Contractually you want to have approval over the subcontractors they use and require approval over any changes to those as a starting point. If you approve things the primary responsibility remains with the supplier or contractor. If you instruct or control who they must you may be assuming responsibility for that supplier's performance or lack of performance. For example in construction in the UK if the Owner specified a subcontractor that had to be used by the contractor, that becomes a "nominated subcontractor".The Contractor's responsibility for nominated subcontractors is different than ones that they selected,even if owner approved them.

In production procurement contracts you would want to approve a number of things and check even more. Not just that a Supplier is ISO Certified, but who their suppliers are, what they provide, whether they are single or multiple sourced, have multiple production locations and where the items are produced. A material supplier may have multiple production locations and some you may not want to have your materials coming from because either that site's reputation for quality or concerns about other things that could impact the supply such as political risk, labor relations issues, ability of materials to freely flow in and out of the country, political instability, economic instability. You would also look at how the products are designed and the raw materials or sub items used to see if there are any potential source issues for those. You could also be looking at the impact other industries may have on the availability of materials.

Ideally you want a supplier that has multiple good suppliers and subcontractors where they could quickly move the business if there was a problem with one. You want to avoid wherever possible custom or unique products that are single sourced and if you must use them you may want them to produce the product for you in multiple locations or license someone else to produce it so you have multiple sources. The more critical a supplier is to your supply chain, the lower you should go in the subcontract tiers. Just like any other chain, a supply chain is only as strong as it's weakest link.

There could be situations where you might need to take action directly against a subcontract. For example if you bought a product with a field replaceable unit (FRU) that was produced by the subcontractor where you were having problems getting replacements from your supplier you might consider requiring that you be named as a third party beneficiary to the agreement between your supplier and the subcontractor. Being a third party beneficiary provides you with privity that you could use to enforce the agreement so you get what they committed to provide the supplier.Being a third party beneficiary creates no liability for you with the subcontractor and has no impact on the supplier or subcontractor’s independent contractor status.