Barriers to supply chain improvement

Out-Law Analysis | 07 Sep 2020 | 7:40 am | 5 min. read

It is important to plan for potential barriers to implementation when assessing what supply chain resilience improvements should be pursued by a business.

The impact of Covid-19 on supply chain delivery and logistics has demonstrated that establishing greater resilience should be a priority. Achieving a structure which provides the necessary agility and dependability has its challenges. However the potential cost of not doing so, in terms of business survival and loss of market position, is now starkly apparent - which makes the effort of meeting those challenges all the more worthwhile.

This is part of a series, find out more about creating a resilient supply chain regime.

Establishing a resilient supply chain is only half the battle. Continuing to monitor, manage, audit, evolve and resolve difficulties within the supply structure remains critical. Solid contractual controls can assist, although undoubtedly these are at their best when used within well-run governance arrangements.

Supply chain transparency

Businesses seeking to improve their supply chain approach may find that, on examination, they hold only limited relevant information about their suppliers, particularly those outside of Tier 1. This can present problems from the outset - for example, seeking greater supply diversification without an understanding of existing supply chain sources and geographies could lead to flawed decision-making and poor mitigation of risk.

Michael Horn

Michael Horn

Solicitor, Legal Director

Achieving a supply chain structure which provides the necessary agility and dependability has its challenges. However the potential cost of not doing so is now starkly apparent.

Obtaining a more comprehensive picture of your supply chain should be an early priority. This will also assist with ongoing supply chain management as you will have better visibility of inventory and flow throughout the supply chain, enabling issues to be identified and dealt with early in the process before supply chain failure occurs. This will further contribute to long-term resilience.

Short term v long term priorities

Unsurprisingly, the Covid-19 pandemic has placed enormous emphasis on short-term decision making, often at the cost of longer term priorities. However, building a resilient supply chain generally demands a roadmap that extends well beyond immediate priorities. Considerations can range from the commercial - minimum terms and volumes, exit payments - through to the technical, for example supply sources for core product technologies.

Lessons can be learned from how business IT strategies have played out in the past, with many examples of businesses becoming increasingly hampered by IT architecture which was developed over time with limited long-term planning. There is a lot to be said for investing effort into identifying and evaluating how decisions made now on commercial terms, delivery dependencies or legal commitments in the supply chain might impact any future shift towards greater agility and reduced risk.

Access to finance

Putting in place a more resilient supply chain may require additional finance in order to enable the changes and ensure that the whole supply chain has adequate funding.

Access to finance may be more limited in the immediate aftermath of Covid-19, and alternative sources of funding may need to be considered in order to be able to deliver these projects. This may require more innovative solutions, and original equipment manufacturers (OEMs) at the top of the supply chain should consider how they can best support their suppliers to access finance, such as through something similar to a supply chain financing programme.

Competition law

Competition law has the potential to interfere with how a business wishes to structure and manage its supply chain. This is particularly the case where seeking to drive increased collaboration within a supply chain, something that we expect to see increase as a result of the impact of Covid-19.

Competition law can impact supply chain strategy in a number of ways, including:

  • what information may be accessed by a business in the course of implementing and operating a supply chain (for example, cost information or information concerning competitor strategies obtained from members of the supply chain);
  • other measures potentially impacting the level of competition in a market - for example, exclusivity arrangements.

Competition authorities were quick to issue frameworks on regulatory interpretation and enforcement in response to the pandemic, enabling critical data sharing and collaboration between suppliers of essential goods as well as expediting compliance inquiry responses. These frameworks suggest that the benefits of supply chain resilience will be a more significant factor when assessing whether related collaborative activity satisfies compliance requirements, even in the longer term.

In any event, there is generally plenty of scope to structure and operate supply chains in a manner that maintains regulatory compliance, outside of activity more distinctly anti-competitive in nature. Businesses should address the potential impact of compliance matters early in the planning process - so-called 'compliance by design' - as it is invariably more difficult to resolve such issues once information exchanges and supply structures are well progressed.

Tariffs and trade barriers

Tariffs and other barriers to cross-jurisdictional work are hardly a new thing. Nevertheless the combination of logistical and legal barriers to transport due to Covid-19; geopolitical impacts on trading relationships; and Brexit, mean navigating the current trade environment can be particularly challenging.

These barriers in themselves should be driving businesses to re-assess related supply chain resilience issues, ranging from sudden shocks to supply chains - such as rapidly imposed trade sanctions - through to the now inevitable but still uncertain post-Brexit trade landscape.

The surge of 'king makers'

We are also seeing an increase in 'king makers' - parties which can create value in the supply chain, by coordinating an alliance of supply chain partners which work collaboratively. This could be the OEM, third party logistics (3PL) provider or another party in the supply chain, with different models emerging. The king maker effectively operates in an integrator role - and, while this can be efficient and effective, it can also significantly impact the balance of power within the supply chain.

You should carefully consider what impact a king maker is likely to have on your supply chain. There are advantages and disadvantages to this model, so it is important to ensure that your business benefits from the adopted approach.

Intellectual property concerns

There is growing complexity around intellectual property (IP) ownership, rights and restrictions in supply chains, and not just in those focused on IT and more advanced and science-heavy industries. This landscape is increasingly impacted by the reliance on connectivity between proprietary and 'open' technologies. Consequently, oversight and appropriate control of access to key IP is vital for many businesses and their supply chains.

Returning to the theme of increased collaboration, many businesses fear that by working together they may risk losing ownership or control of IP in new developments. However, if properly managed, collaboration should drive greater value in IP for the collaboration parties. Parties will, however, need to take a considered approach, jointly document their intended IP ownership outcomes and an aligned IP registration strategy, along with other associated matters.

Finding the right partners

Finding the right supply chain partners has always been critical to success. In the run up to the pandemic taking hold, factors like alignment of social, environmental and other ethical values were becoming real priorities to businesses when choosing their commercial partners - for example, emissions control and avoidance of undesirable practices such as modern slavery.

While the immediate scramble to stabilise operations may have meant such considerations have taken a back seat, it is readily apparent that they reflected a variety of drivers and pressures which have not gone away: market demand for products consistent with the buyer's social outlook; the longer term viewpoint of companies seeing real benefit in using sustainable sources, etc.

The challenge will remain how to combine satisfying those requirements while maintaining supply chain resilience. While these factors can certainly co-exist, appropriate due diligence will be necessary to identify sufficient alignment of culture, approach and longer-term business planning.