15. April 2020
Radar - April 2020 – 2 von 5 Insights
Supply chains continue to feel the impact of COVID-19 with many key manufacturing hubs being hit the hardest. Those companies heavily reliant on China for products, raw materials or component parts are experiencing unprecedented disruption. The issue is not limited to China and supply chains across the world are vulnerable, experiencing similar issues all at the same time. Supply chain risk management is being tested to the limit with businesses having to act quickly to mitigate risks.
Disruption is resulting in long lead times, delivery delays, increased logistics costs and the need for businesses to consider alternative sourcing arrangements. As cash flows inevitably tighten, non-payment of goods will also be an issue. A number of high profile retailers have frozen supplier payments where stock is exceeding demand.
Consumers are also affected. Empty supermarket shelves, shortages of essential goods and purchase restrictions are only some of the visible challenges presented to consumers by the pandemic.
China has now begun to re-open some of its factories, but the disruption persists globally as manufacturing levels are likely to recover gradually. Many retailers are already in a position that puts obligations in consumer contracts at risk of not being met.
While governments and international institutions are being urged to maintain the resilience of the supply of essential services, many services depend on fast and efficient supply chains and the COVID-19 outbreak is proving to be unprecedented in its scale and severity.
Each sector and each business will be facing different supply chain issues but key issues are likely to include:
Supply shortages and delays
Challenges include port and production plant closures, new export/import restrictions and depleting inventory levels. As a result, it is becoming increasingly important for businesses to create transparency, evaluate supply chain designs and assess realistic final-customer demand. Manufacturers should engage in constructive dialogue with suppliers in order to monitor lead teams and optimise production capacity. See here for detail on considering alternative suppliers.
Limited labour
With restricted travel and prolonged quarantine periods, businesses are facing significant labour shortages. This is leading to inefficiency in delivering customer services and disruption in other key business areas, for example, product safety, product monitoring/tracing and engineering – all of which are vital in ensuring safe and quality products are made available to consumers.
Consumer protection
As with data protection and competition law, consumer protection laws continue to apply. A key risk for businesses is not being able to adequately meet consumer demand – we have all heard stories about bulk buying toilet roll and excessive prices for hand sanitiser. Businesses with a strong online presence are proving more resilient and online sales are moderating some of the damage. However, they also present an increased cancellation risk if delivery becomes subject to significant delays. See here for more on consumer issues.
Supply chain risk management systems are being tested to identify issues and you should take early action to mitigate risk and plan resolution.
The legal analysis of supplier contracts should be mapped against commercial drivers for the business, looking at which contracts are most commercially important. The exact position will vary depending on the contract and relevant governing law, but you may wish to consider the following:
Also consider taking the following practical steps:
It is clear that the pandemic will force corporate decision-makers to rethink future global supply chain designs. Going forward, there will be an increased need for a diversified supplier base in order to hedge against disruptions to a particular geographic region or producer, for example. This is while maintaining transparency and an understanding of where goods come from especially below tier-1 suppliers which is often complex. It is likely that traditional factors such as cost, delivery and quality will be considered in supply chain management alongside new metrics such as responsiveness and resilience, as well as changes in consumer behaviours when there are extreme pressures on supply and demand.
There is also likely to be an increasing number of businesses that set up a supply chain risk management function to assess risk and develop remediation planning strategies to deal with economic, environmental, health or political crises.
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