Supply chains in the ‘sharing economy’: disruption or continuation?
Manufacturers have always been at the forefront of developing new business models. But do trends like the ‘sharing economy’ and fractional ownership…
Manufacturers have always been at the forefront of developing new business models. But do trends like the ‘sharing economy’ and fractional ownership pose unprecedented challenges to manufacturers’ business models? What are the challenges – commercial and legal – that manufacturers face in adapting their supply chains to such new business models?
New business models
Inventing new products and creating new markets for these products is one of the greatest contributions made by manufacturers. Henry Ford apparently commented that if he had asked his customers what new product they wanted, they would have said a faster horse that ate less hay. Similar sentiments were no doubt felt by manufacturing innovators from Caxton to Edison to Jobs.
Producing and selling related products and add-on services is also a long-standing model, used by manufacturers to expand their offerings to customers beyond a core product. Such a model helped manufacturers transition from the traditional one of making a product and conveying physical ownership to the purchaser, to a world in which after-sales service care, product insurance and other benefits were made available by manufacturers. Leasing has long been a part of this, with manufacturers of aircraft, cars and construction equipment notably adopting such a model. General Motors, for example, started making cars in 1908 and started offering financing to its customers through its highly successful GMAC division as early as 1919.
Manufacturing covers such a diverse range of products, sectors and types of users that in any one sub-sector, any number of business models can exist at any one time – indeed even within the same manufacturer. Such myriad business models thus follow anything but a linear path. One response to challenges that can be seen to have been developed by many manufacturers of particularly ‘big ticket’ products is that of the subscription-based model. Rolls Royce developed its ‘Power-by-the-Hour’ approach, whereby its airline operator customers only pay per hour that the engines are used, as early as 1962.
We have long paid for temporary access to a product, whether hiring skis or cars when on holiday. But the strength of consumer preferences to pay to access a product, rather than own it outright, lies at the heart of this new ‘sharing economy’. The breadth of products to which it has been applied is also noteworthy, moving far down the cost scale beyond ‘big ticket’ airplane engines. A variety of push and pull factors may have contributed to this trend, whether ownership as a concept becomes unappealing or uneconomical, or whether consumers favour the flexibility and socio-economic-environmental benefits of collaborative consumption.
Car manufacturers, for example, will still produce cars – but they will sell perhaps fewer and will seek out alternative models, such as partnering with ride-hailing platforms. The value chain for such manufacturers will clearly change, as different customer demographics and a broader set of stakeholders come to the fore. But the supply chain itself may not need to change too much. One exception might be those manufacturers deploying planned obsolescence, which will need to return to making sturdy products to ensure they satisfy the often differing needs of the shared economy’s users, as manufacturers discover that old-fashioned product characteristics like robustness and reparability are back in vogue.
With this rich history of innovation, manufacturers might well see the latest trend of fractional ownership - arising from today’s ‘sharing economy’ - as being least disruptive to the supply chain aspects of their business models. The technology used within the latest products might be unprecedented, such as that required for driverless cars or for car-share services like Zipcar, but the business models adopted by the manufacturers to make and sell these may well incorporate elements that, discretely, have long been used, such as outsourced manufacturing or B2B2C insurance contracts, among others. Perhaps a case of plus ça change…
Commercial and legal challenges posed by new business models
One other constant is the commercial and legal changes that such manufacturers must make to ensure their arrangements are aligned with their ever-evolving business models.
Manufacturers undertaking new product development and establishing new production plants may well need to enter into service contracts for directors and other employment contracts for engineers. Manufacturers will also require new contracting arrangements with utilities providers to ensure new production plants are powered up, and with logistics providers to ensure delivery of finished products coming off the factory line.
When manufacturers buy in new IP or collaborate with new technology and other partners, corporate/joint-venture partnership agreements need to be created or updated. When forming such R&D joint-ventures, manufacturers need to ensure that they are staying compliant with competition law.
Regarding competition law, manufacturers themselves may have fallen victim to price-fixing cartels of the products they use within their own supply chain and could therefore bring damages actions to recover sums overpaid. For example, for a number of decades, any computer or TV screen assemblers in Europe or Asia would have been affected by various price-fixing cartels operated by their component suppliers, whether the manufacturers were buying technology that was declining (such as cathode-ray tubes) or emerging (such as LCD screens) and whether the manufacturers were buying such products directly or indirectly.
A manufacturer switching to a new business model (like IBM switching from manufacturing computers to providing cloud and analytical computing services) may involve a change in the type of insured risks, which will require the mapping and coverage of potential new and long-tail liabilities.
Manufacturers shifting to an outsourcing model may find it necessary to close down a now obsolete plant, and would then need to address redundancy issues, as well as real estate matters.
Manufacturers may even face insolvency risks, if such commercial and legal matters are tackled too late in the day.
Weightmans is pleased to announce the launch of a new, national report “Weightmans evolve: The supply chain of the future”. The report highlights experiences and opinions from supply chain leaders, sector experts and our very own legal specialists. Download a copy of the report.
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