GUIDELINES FOR PARTNERSHIP

IN INDUSTRIAL SUBCONTRACTING

EUROPEAN COMMISSION
Directorate-General XXIII: Enterprise Policy, Distributive Trades, Tourism and Cooperatives

A UNICE-DG XXIII initiative

Mr Franois PERIGOT (photo+signature)

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President of UNICE, Union of Industrial and Employeurs Confederations of Europe

UNICE, in collaboration with the European Commission, is pleased to publish this guide,
which proposes ground rules and principles that have proved their worth for building solid
and dynamic partnerships in subcontracting. This guide is based on the best practice
identified, in particular, in the areas of payment conditions, quality, industrial property and
specialised cooperation arrangements.
Because it brings together the great majority of firms of all sizes (large, medium and small),
UNICE could not ignore the economic relations between these partners, who tend to be too
often considered in isolation even though their fates are closely linked. The prosperity of
SMEs is dependent on the success of their larger customers and, conversely, the
competitiveness of large companies depends in large measure on the quality of the work
supplied by small and medium-sized enterprises.
UNICE is convinced that exercise of a certain amount of self-regulation by all parties is the
best approach for injecting dynamism into subcontracting relationships, in the interests of all
concerned.

Mr Christos PAPOUTSIS (photo+signature)

European Commissioner responsible for Enterprises policy
European SMEs, unquestionably the driving force for employment and growth, are
indispensable for the construction of a cohesive Europe and for the development of the Single
Market. They generate two thirds of all jobs adapt more rapidly to changes and are a major
contribution for regional and local development.
The essential role which SMEs play in Europe is the result of a competitiveness based on a
high level of quality of services and products.
The third Multiannual Programme in favour of SMEs aims to support and to reinforce the
development and employment potential of SMEs within the European Union as well as
internationally, particularly through developing Subcontracting partnerships - i.e. by
improving cooperation between purchasers and suppliers.
Against this background, I welcome the joint UNICE and DGXXIII initiative embodied in the
Guidelines for Partnership in Industrial Subcontracting. The emergence of a new European
approach to industrial Subcontracting in response to economic and trade globalisation holds
major development potential. Translating this potential into reality hinges on innovative inter-
enterprise relationships, i.e. on close cooperation and stronger partnership between purchasers
and suppliers starting at a stage well upstream of production.
The Guidelines for Partnership in Industrial Subcontracting represent an important initiative
setting out a consensus-based code of practice and management rules for the parties
throughout the whole supply chain. Far from imposing constraints on the partners, these
essential rules of the game are designed as an aid to choosing and preparing the ground for
Subcontracting.
I hope these guidelines will help bring about enduring and more effective inter-enterprise
collaboration as a source of fresh impetus in Europes bid to meet the challenges of newly
emerging markets.
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GUIDELINES FOR PARTNERSHIP

IN INDUSTRIAL SUBCONTRACTING

TABLE OF CONTENTS

PREAMBLE

1. GENERAL RULES OF COOPERATION

2. PRICES, COSTS, TERMS OF PAYMENT

3. QUALITY

4. CONFIDENTIALITY AND INDUSTRIAL PROPERTY RIGHTS

5. LOGISTICS BETWEEN SUPPLIERS AND PURCHASERS

6. SPECIAL MEANS OF PRODUCTION

 GUIDELINES FOR PARTNERSHIP

IN INDUSTRIAL SUBCONTRACTING1

PREAMBLE

In an effort to hold their own in the face of ever intensifying international competition,
representatives of purchasers and suppliers within UNICE have formulated these guidelines
for partnership in industrial Subcontracting. These guidelines are intended to establish the
basic principles and set a recommended framework for partnership between the parties
throughout the whole supply chain. The essence of partnering is cooperation between a
supplier and a purchaser for their mutual benefit. The most successful partnering
arrangements are those built on the competitive strengths of the partners and characterised by
factors such as top level commitment, good communications, cultural fit, trust, flexibility and
team working.

These guidelines are designed to strengthen the competitiveness of European industry by

ensuring co-operative supplier/purchaser relations and fair competition. This would allow the
benefits and burdens of change to be shared out on an equitable basis. Even when facing
competitive pressures, partners must still respect the generally accepted conventions of good
commercial practice. All parties are in agreement that final customer satisfaction should be
recognised as the benchmark in all efforts continually to improve products and processes, and
that this improvement should be achieved in a spirit of mutual agreement.

Contracts must ensure a fair balance of interests. However, these guidelines do not interfere
with contractual freedom between suppliers and purchasers, who may continue to choose the
most appropriate legal structures and contractual clauses to organize their commercial
relationship. Rather they are meant to serve as a reference for parties negotiating a
Subcontracting agreement. They may also serve as a basis for specific sectoral agreements2
and for legal texts such as model contracts and general conditions.

1 The term "industrial Subcontracting" refers to all operations where a purchaser buys from a supplier
products or services which are specified by the purchaser and form part of the purchaser's products.
2 Such agreements may reflect the particular needs of certain sectors especially of the building industry where
the term Subcontracting refers to the execution of part of the works by another contractor on a common
construction site in contractual relationship with a main contractor.
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1. GENERAL RULES OF COOPERATION

1.1. During the concept and development phase of new products and processes, interested
purchasers should cooperate with suppliers in exchanging ideas and information. Both
parties must respect the confidentiality of such information.

1.2. The early involvement of suppliers in the development phase should be encouraged.

1.3. Services to be provided during the development phase of a product or process should be
defined jointly by the partners, specifying the areas of responsibility and agreeing as to
the payment for these services.

1.4. In the event that a purchaser organises a selection phase in which several potential
suppliers compete against each other, he should communicate his decision on which
supplier has been chosen as rapidly as possible so as to avoid unnecessary expense for
himself and for the suppliers not selected.

1.5. In appropriate areas, joint design should take place, and where needed be accompanied
by guidance from the purchasers.

1.6. As soon as possible during the development phase, the partners should discuss warranty
conditions as well as liability.

1.7. Recognising the potential improvements to competitiveness stemming from the

adoption of simultaneous engineering, both partners should strive to increase and
improve the application of such processes.

1.8. As appropriate, purchasers should initiate technical assistance programmes to help

suppliers adopt new manufacturing methods and improve productivity and quality.
Where needed, such technical assistance programmes may include co-operative training.

1.9. Project-related information should be treated as sensitive and confidential. Design

information (including CAD data, product/process know-how, process FMEA (Failure
Mode and Effect Analysis) should not be disclosed without mutual consent. Exceptions
must be provided for in contracts, in detail, and must take into account the interests of
both partners.
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2. PRICE, COSTS, TERMS OF PAYMENT

2.1. Price, costs

2.1.1. General

Prices should be agreed under conditions of fair competition on the basis of

identical requirements notified to competing suppliers. Partners should aim for
continuous cost reduction during both the development and the production phases.

It is important to specify which elements and services the price covers, for
instance: tools, inspections, buffer stocks, packaging, transport, taxes, warranties,
insurance, etc.

The parties should mutually agree on the appropriate price adjustments stemming
from changes in specifications or additional requirements (e.g. logistics, warranty)
insofar as they influence costs.

The price must also be related to a definite quantity. If the purchaser takes
considerably more or less than the agreed quantity, the parties should mutually
agree to adapt the unit price adequately.

The same applies if the purchaser deviates considerably from the agreed frequency
of call-off3 and therefore causes unduly large fluctuations (overloads or idle
periods) in the supplier's production process.

If the contract is terminated prematurely, the party which had reason to rely on the
contract's continuation must be indemnified for its input.

2.1.2. Methods of establishing the price

There are two different methods of establishing the price in a supply contract. If
the product is defined from the start, the price may be decided by bargaining.
Where the parties co-operate in the development of the product, they may also co-
operate in establishing the price by joint cost control.

Bargaining

A price established by bargaining for a given period may not be altered, except
under an agreed price adjustment or renegotiation clause. A long-term contract
with a fixed price should leave the door open for renegotiation of the price to take
into account major unforeseen cost fluctuations.

If the parties intend to prolong a contract which is due to expire they should start
bona fide negotiations in good time in order to have the supplies beyond the
expiry date covered by an agreement on the price.

3By call-off, the purchaser specifies time and quantity of a partial delivery in a long-term contract.
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Joint cost control

The fixing by bargaining of market prices for products is increasingly being

replaced by joint product and cost planning or control. Wherever the price of the
final product is determined by the market from the outset, realistic market
opportunities for all those concerned can only be opened up by means of joint
product and cost planning or control. Since both parties are interested in the final
product being successful in the market, the individual inputs must remain open to
value and cost analysis.

Mutual fairness is an essential prerequisite for such cooperation agreements: this

is particularly true for the confidential treatment of a partner's special know-how
or for allocation of the profits resulting from productivity gains or wider margins.

2.2. Terms of payment

The terms of payment which result from commercial bargaining should be fair to both
partners, and should achieve an economic and financial result from which both partners
will benefit in the long term.

The best means of ensuring that this occurs is for both partners to put in place good
credit management techniques. Responsible companies should:

- have a clear, consistent policy that they pay bills in accordance with contract,

- ensure that both the finance and purchasing departments are aware of this policy
and adhere to it,

- agree payment terms at the outset of a deal and stick to them,

- not extend or alter payment terms without prior agreement,

- provide suppliers with clear guidance on payment procedures,

- ensure that there is a system for dealing quickly with complaints and disputes and
advise suppliers without delay when invoices, or parts of invoices, are contested.

If the agreed payment period exceeds the time reasonably needed by the purchaser to
verify the invoice and arrange due payment, this should be regarded as a credit by the
supplier to the purchaser and be taken into account when the price is fixed.

The terms of payment should contain a clause whereby the supplier is automatically
entitled to interest at an agreed rate if the purchaser fails to pay the correct amount on
time.
3. QUALITY
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3.1. Purchaser and suppliers should strive to adopt a common approach to quality within a
jointly defined framework. A joint commitment to total quality improvement at all
levels should be made by both partners.

3.2. Quality assurance agreements between purchasers and suppliers are looked upon as fair
if:

- they make a clear distinction between specifications of a supply and quality assurance
methods;
- they contain specifications clearly defined by mutual consent without, however, being
ranked as guaranteed product features or warranties; whenever possible the parties
should make use of international standards in order to define quality specifications
clearly;
- they clearly define the mutually agreed methods by which incoming goods are to be
controlled;
- they do not impose unreasonable demands, risks or costs on either party through
provisions contained in them regarding; for instance:

- items subjected to quality controls and procedures for such controls,

- documentation and record-keeping obligations,
- alterations to quality requirements or to procedures for dealing with quality
problems relevant to the agreed product specifications;
- they satisfy a justified demand to safeguard against any free transfer of know-how
through a binding offer to conclude a confidentiality agreement, should the case
arise;
- they respect legal rules e.g. about liability for defects or product liability.

3.3. Quality assurance systems gain international recognition if they comply with the
standards EN 29000 ff / ISO 9000 ff and if their application is certified at reasonable
intervals through audits performed by an accredited certification body (third-party
certification). If these conditions are fulfilled, purchasers' audits (second-party
assessment) should as a rule only be carried out in the form of process and product
audits. Such audits should only assess purchaser-specific processes and products at
reasonable intervals or for some justified reason. Duplication of quality assessment
work should be avoided through mutual recognition of certification performed by
different entities.

4. CONFIDENTIALITY AND INDUSTRIAL PROPERTY RIGHTS

4.1. In a partnership in industrial Subcontracting, each party will acquire confidential know-
how from the other. The manufacture and use of products may also involve the use of
patents, registered designs, computer software and trade marks. The parties are further
likely to develop new know-how and acquire new industrial property rights during their
cooperation. It is therefore important that the parties agree on their respective right to
use and their obligation to protect such confidential know-how and industrial property
rights.
4.2. An agreement on know-how and industrial property rights will normally be considered
to represent a fair balance of interests if:
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- the basic principle applies that the party who works to develop know-how also enjoys
the benefits of his work;
- the supplier undertakes to inform the purchaser if, during realisation of the contract, he
intends to make improvements or to apply for a patent or other protection for
innovations acquired from his own know-how;
- it contains specifications, clearly defined by mutual consent, on patents or other
protections for innovations in the supplier's manufacturing technology, resulting
from the know-how of both parties;
- each party receives a licence to use the other party's know-how and other industrial
property rights to the extent necessary for fulfilling the contract; but that no
transfer of proprietary rights to such know-how or industrial property rights shall
take place unless the parties have agreed a reasonable payment for such rights;
- the parties are required to treat the other party's know-how as confidential insofar as it
has not entered the public domain;
- any restrictions on using the acquired know-how in other contractual relations are in
conformity with the applicable rules on competition;
- the party responsible for the design is liable for any infringement of third parties'
industrial property rights that may result from the manufacturing, marketing and
use of the product. The supplier should, however, not be liable if the infringement
is due to the purchaser's instructions or if he has not been informed of the
countries where the products will be sold or used.

5. LOGISTICS BETWEEN SUPPLIERS AND PURCHASERS

5.1. The objective of logistics is to optimise the material flow between suppliers and
assemblers at all stages, as well as within individual companies - i.e. along the entire
value chain of a product - for instance in terms of timing, costs and delivery reliability
so as to meet assemblers' needs.

As a rule, optimisation is focused on:

- a rapid material flow (short storage times) with inventories built up and replenished at
the lowest possible costs,
- high flexibility to adjust to changes in assemblers' needs.

5.2. Alongside pure supply contracts additional agreements between the parties on
communications and other services (logistic services) have recently gained in
importance, e.g. agreements on:
- computer-aided exchange of information and the technical preconditions of this
exchange,
- allocation and co-ordination of distribution services, possibly by bringing in third parties
as suppliers of specialist services,
- pre-treatment or pre-assembly of components or systems,
- installation of systems by the supplier in the assembler's production area.

5.3. Combined supply and logistics contracts require a clear and mutually accepted
identification of the goods and services to be supplied, the time and place of delivery,
and the moment when risk is transferred. Risks resulting from logistics contracts must
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also be taken into consideration. Only a complete statement of the goods and services to
be supplied and payment for these goods and services at market prices make it possible
to define the best logistics solutions.

5.4. Risk and cost minimisation of supplies and logistic services is above all determined by:

- the maximum and minimum quantity of each delivery, the attendant minimum call-off
periods, suppliers' notification periods and delivery intervals,
- the way in which the goods are to be supplied and invoiced (means of transport, place of
delivery, packaging, etc.),
- the period within which the purchaser must take delivery of the goods ordered,
- notification periods in the event of changes in, or discontinuation of products,
- agreement on minimum or maximum stocks to be maintained along the logistics chain,
especially in the case of forwarders' warehouses and stocks on consignment,
- special requirements regarding quality and the implementation of Electronic Data
Interchange (EDI) linked with logistics.

6. SPECIAL MEANS OF PRODUCTION

6.1. Purchase, use and maintenance of the specific means for production (tools, moulds,
prototypes, models, profiles, quality control equipment) of the goods to be supplied
should be detailed in full and regulated in the contracts. Purchaser and supplier have to
consider carefully in their contract appropriate clauses with a view to securing a fair
balance of interests. It must be specified whether the purchaser will reimburse the
supplier's expenses for production, purchase and maintenance of the special means of
production through direct payment or by inclusion in the price of the supplies
concerned. The contract should further state the respective obligations of the parties as
regards maintenance, repair, insurance and replacement of the specific means of
production.

6.2. The partners should from the outset agree on the right to use the means of production so
that they fairly reflect the economic effort and input of know-how from both purchaser
and supplier with respect to production, purchase and maintenance of the special means
of production. The right to use the special means of production placed by the
purchasers at the suppliers' disposal should lie with the supplier as long as he uses them
for the exclusive purpose of supplying the purchaser.

6.3. The purchaser's legitimate interests may justify his decision to restrict the supplier's
right to use the means of production (e.g. by stipulating their exclusive use for the
purchaser's order) or to demand that they be handed over. This applies to specific
means of production solely owned by the purchaser especially when delivery is unduly
delayed or the products supplied are defective, or when the supplier goes bankrupt.

6.4. Particular care has to be taken as well to ensure that manufacturing secrets (know-how)
incorporated in the means of production are not used without the prior consent of the
entitled party and that reasonable settlement for the manufacturing secrets concerned is
guaranteed by mutual agreement.
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