The “Free Mold Storage” Problem: What It Reveals About SME Supplier Governance

Why Has “Free Mold Storage” Surged?

The number of correction orders from the Japan Fair Trade Commission concerning “free mold storage” has surged to 31 companies. This practice, which violates the Subcontract Act (Act Against Delay in Payment of Subcontract Proceeds, etc.), refers to a prime contractor (ordering party) forcing a subcontractor to transfer ownership of a mold, produced at the subcontractor’s expense, free of charge and to bear its storage costs. The recent establishment of a specialized consultation desk by Nihon Seikei Sangyo Co., Ltd. to protect manufacturer compliance and productivity is a response to the worsening severity of this issue.

Many managers will view this news as a “Subcontract Act compliance problem.” However, this is a superficial view. The essence lies in the structure where deficiencies in a company’s own governance design push risks onto “external” trading partners, ultimately weakening its own supply chain. Continuing to place orders while leaving the ownership and storage responsibility of molds ambiguous is an unintended outsourcing of asset and risk management responsibilities.

The Core Issue is the “Design of Risk Externalization”

It is clear that “free mold storage” violates the Subcontract Act. But why does such a practice emerge, and why does correction stall? At its root lies a governance design by prime contractors, including SMEs, that defaults to “risk externalization.”

Specifically, the following “design flaws” can be considered:

1. Ambiguity in Asset Management Responsibility

Whose asset is the mold? It is a crucial production tool for manufacturing, and its production cost is included in the subcontract price. Legally, it should be the property of the subcontractor. However, prime contractors, viewing it as a “dedicated tool for making our products,” subconsciously treat it as their own asset and demand its storage. This exposes the absence of internal rules regarding asset ownership.

2. Lack of Cost Structure Visibility

Storing molds incurs costs such as space rental, management fees, and insurance premiums. Forcing subcontractors to bear these costs effectively constitutes a reduction in subcontract prices (abuse of superior bargaining position). This problem will not be corrected if the prime contractor’s management or purchasing department fails to recognize the structure where “invisible costs” are being transferred to trading partners. These costs are not made visible in accounting.

3. Underestimation of Supply Chain Risk

Imposing excessive burdens on subcontractors weakens their financial health, ultimately jeopardizing supply stability for the prime contractor. Furthermore, the damage when legal risks like correction orders or damage claims materialize is immeasurable. This is a classic structure where “short-term cost reduction” creates “medium- to long-term supply chain risk.” Risk assessment is often binary—either “0 (no problem)” or “100 (violation)”—rather than being managed as a continuous scale from “1 to 99.”

Three Options for the “Mold Problem” from a Governance Perspective

So, how should managers confront this issue? The answer is not simply “obey the Subcontract Act.” It is necessary to list and compare options for appropriately designing risk while sustaining one’s own business.

The main options concerning mold ownership and storage are the following three:

Option A: Treat the mold as the subcontractor’s asset and borrow it via a “loan for use” contract when needed.

Advantages: Legally clearest, with Subcontract Act violation risk near zero. Asset management responsibility lies with the subcontractor, and the prime contractor’s balance sheet remains lean.
Disadvantages (Risks): Potential need for borrowing negotiations during urgent production requests (Mobility Risk: 20-30). If the subcontractor goes out of business, recovering/transferring the mold becomes an issue (Continuity Risk: 10-20).

Option B: The prime contractor purchases the mold and stores it in its own or a third-party warehouse.

Advantages: Complete control over asset management and production mobility. Subcontract Act violation risk is zero.
Disadvantages (Risks): Requires initial investment (Financial Risk: 40-80, depending on scale). Ongoing costs for storage space and management (Cost Risk: 50). Need to internalize know-how for mold maintenance (Organizational Capability Risk: 30-60).

Option C: Contract where mold ownership remains with the subcontractor, but storage is handled for a fee by the prime contractor (or a specialized company).

Advantages: Legal risk is low (Risk: 5-10), and mobility is high. Utilizing specialized services (e.g., services like the consultation desk from Nihon Seikei Sangyo) can reduce management burden.
Disadvantages (Risks): Requires calculation of appropriate storage fees, potentially complicating negotiations (Negotiation Cost Risk: 30). Insufficient contract design may leave room for it to be deemed de facto free storage (Legal Design Risk: 20).

The key is to evaluate these options against your company’s business characteristics (predictability of production plans, mold value and size, relationship with subcontractors, etc.) on a “1 to 99” risk scale and document the assessment. Don’t stop at “Option B is safest”; make a management decision on whether you can accept its costs and risks.

Supplier Governance Check for SMEs to Start Today

The mold problem is not limited to manufacturing. It can exist in any industry: knowledge provision in services, handling of source code in IT—anywhere “invisible costs forced upon trading partners” may lurk. Use the following three steps to check your company’s “supplier governance.”

Step 1: Inventory of “Externalized Risks”

Review contracts and actual workflows with key suppliers together with the purchasing/ordering department head. Use the following checklist:

• Are ownership and management responsibility for assets (physical, informational, rights) clear in the contract?
• Are appropriate fees paid for sudden changes or additional work requested for the company’s convenience?
• Are there any “invisible costs” borne by the trading partner (storage fees, management man-hours, opportunity loss, etc.)?

Step 2: Risk Assessment and Listing Options

For issues identified in Step 1, list three or more options, similar to the mold problem above. For each option, write down the “advantages” and “disadvantages (evaluated on a 1-99 risk scale)” for your company. At this stage, ask your legal team not “is this allowed or not?” but “what contract terms are needed to make this option viable?”

Step 3: Documenting Decisions and Regular Review

Document which option is adopted and the reasoning (which risks were accepted to what extent) in meeting minutes or internal documents. This is not just a record; it becomes “the baseline for design changes” when trading partners change or regulations are revised in the future. Establish a process to review relationships and risk design with key suppliers at least once a year.

Governance is Not Completed Within Your Company’s Walls

The surge in JFTC correction orders for “free mold storage” offers us a crucial insight: the quality of governance cannot be measured by internal controls alone. What burden and risk does the system your company designs create for external organizations like trading partners? Could that chain reaction ultimately transform into a risk threatening your own business continuity?

Excellent governance is not just about legal compliance; it is a “blueprint for overall optimization” that appropriately allocates risk and cost between your company and its stakeholders (trading partners being a vital part). The judgment surrounding a single mold, in fact, reflects the essence of a company’s governance. Why not start re-examining your company’s “supplier governance” today?