Out-Law Guide | 01 May 2020 | 4:13 pm | 7 min. read
In the UK, many products and services depend on fast, efficient supply chains which are highly integrated and often operate cross-border. The coronavirus outbreak has disrupted supply chains around the world, many of which ground to a halt during the lockdowns imposed by global governments in response.
As we saw during the global financial crisis, any supply chain is only as good as its weakest link. Companies should act promptly to assess the risk of supply chain failure as a result of pressure from the Covid-19 pandemic.
The damage caused to your business by unforeseen supplier insolvency can be serious. It is potentially damaging to brand and goodwill, and an unwelcome drain on financial and management resource.
Pro-active planning is critical to maintain continuity of supply and to avoid your business facing production line failures, delayed deliveries to customers, inefficiencies and increased costs. There may be downstream penalty payments to be made to customers unsympathetic to your situation and all too willing to lay the blame for the disruption at your door. Still worse, such delays can result in significant damages claims for breach of contract.
Pro-active planning is critical to maintain continuity of supply and to avoid your business facing production line failures, delayed deliveries to customers, inefficiencies and increased costs.
The following steps will greatly enhance your prospects of identifying any risks inherent in your supplier base, so that you can do something about them.
Score each supplier on the impact their sudden failure or insolvency will have on your business. Use a ‘traffic light’ warning system to prioritise and flag problem suppliers. Where critical suppliers are identified consider how quickly, easily and cheaply they could be replaced and whether back-up or dual suppliers could be put in place now to reduce the risk of failure.
Where supplies are crossing borders the risk of disruption and impact of Covid-19 are increased. You will also need to consider carefully the timing and pace at which lockdown is being lifted in the territory of the supplier. Can any critical supplies be brought onshore or is it appropriate to stockpile any goods or parts to avoid short term disruption?
It’s not just suppliers themselves but logistics providers that will be critical to keeping goods moving. Work with logistics providers to ensure that routes keep as free moving as possible. Maintain an open dialogue with providers and consider back up providers or contingency options in the event of delays on critical goods or products.
You should have a clear understanding of what contractual terms apply with your suppliers in respect of any issue. For example, who is responsible for delivery? Who bears the exchange rate risk? What terms will apply in the event of an insolvency, particularly around payment, passage of title and risk, set-off, assignment and termination? Knowing these in advance provides an opportunity to potentially renegotiate any critical terms, as well as a competitive advantage in a time-critical situation.
We would recommend that a log is kept for each supplier, particularly those identified as business critical. This should include:
This will increase the chance of minimising impact and maximising recovery should a supply chain failure occur.
For critical suppliers, you should consider incorporating financial distress and corporate resolution planning measures into your contract. This is a contractual mechanism by which suppliers are obliged to notify you of certain financial distress events or corporate changes, and to put in place a plan to mitigate these.
These terms can be a very effective way of giving you early notice and ensuring you are part of the conversation around recovery plans. This helps avoid the failure in the first place, putting you in a stronger position and solidifying relationships with suppliers.
Ongoing access to and reviews of current financial data in the form of management accounts or cashflow records will help you spot the potential for problems. This may require going beyond the day to day contact between your procurement and their sales team and getting a line directly to their financial director.
Knowing what makes your suppliers tick is vital. What promotes their success. Where is their break even point on volume? Are they overexposed to loss of a particular customer or the failure of one of their own suppliers? Are they at risk on major litigation or a bad debt?
How likely is it that your suppliers would speak to you openly in the event of difficulties? Consider whether you can improve this.
Much of the information you need may already be reaching some of your organisation, but not the ears of those who can do something about it. Consider who in your business has contact with your suppliers. Are they the right people? Are they aware of the importance of reporting relevant information to the right people internally?
Businesses should ensure they have processes and procedures in place to spot difficulties, and act on them, early. Some of the largest supply chain failures in history came about because early warning signs were not aggregated through an official business process and therefore no action was taken.
Businesses should be particularly vigilant about:
It is one thing to have internal systems in place to pick up relevant information on your suppliers, but another to use them effectively. Being proactive and ahead of your customers can make all the difference in these situations.
Some specific actions businesses can take include:
Specific, appropriate advice should be sought before taking action in relation to any of these options.
06 May 2020
13 Mar 2020