Fixing the weak link in the supply chain

The last year has highlighted the fragility of the global supply chain. Governments locked down countries or regions, causing a slump in exports from the West, while consumer spending switched from services to goods, increasing imports from the East. With empty shipping containers piling up in ports in Europe and the US, the Ever Given’s grounding in the Suez Canal causing delays, a fresh COVID-19 outbreak in major Chinese ports forcing diversions, and consumer demand showing no signs of abatement, shipping prices have skyrocketed.

Battening down the hatches

Business leaders are faced with a bewilderingly high level of complexity to navigate. On shipping prices alone, they need to consider whether to pass on the higher costs to their customers and risk losing business to suppliers of locally-produced products, or to absorb the cost in the hope of prices returning to normal, or even delay shipping until the crisis subsides. But it’s not just about cost – the supply chain is fraught with other issues – from high demand for electronics during the pandemic shortages of semiconductors affecting the automotive industry, to manufacturing challenges and new homes demand (and lockdown building projects) resulting in shortages of building supplies in the construction industry.

Businesses are, understandably, looking at solutions to shield them from the crisis – most notably changes in supply chain to diversify risk, such as adding local and regional suppliers to the chain along with the long-haul destinations, changing freight methods from shipping to air, or looking closer to home and altering product designs to use less scarce components. Digital transformation is also high on the agenda, in order to streamline operations, use data to identify and mitigate issues, reduce cost, and improve the customer experience.

Leaders also need to consider sustainability in general – from preventing human rights violations, to ensuring health and safety of workers in the chain, and to limit the impact on the environment. This requires, within the supply chain, the implementation of responsible sourcing, due diligence and risk analysis to assess the respect for human rights, traceability monitoring and implementation of means for environmentally responsible logistics.

All hands on deck

The general counsel’s (GC) role is paramount in helping the business navigate the supply chain crisis. By monitoring supply chain contracts, the GC may be able to anticipate suspension, modification, revision of prices, or termination of contracts – some of which may lead to litigation or liability risk management.

Another consideration is the possibility of using the Force Majeure clauses. GCs need to verify whether such clauses can be evoked for the global shipping crisis and note the consequences regarding their contractual obligations (such as the potentially inability to fulfil contracts with customers as a result of inability to secure products or components).

If new local or regional suppliers are added to the chain, new contracts will need to be drafted, and protection included for both parties.

Getting on the right track

GCs need to build action plans for the legal management of their supply chains, which may include several short-term actions such as:

• Mapping/reviewing and analysing contracts with suppliers, subcontractors, logisticians, key carriers, to assess key areas of legal and environmental, social, and governance (ESG) risks
• Diagnosing existing flexibility tools within the company, including mobility, working hours and remuneration
• Performing supply chain due diligence and compliance with sustainability requirements (with regards to ESG risks)
• Renegotiate contracts with suppliers and customers to cushion the short-term effects of the crisis.