Supply chain feeling the strain?

12 Aug 2021

‘Supply chain’ is a term that the public have come to know well through experience in the last year or so. For example, Brexit may have meant some of us had  to wait longer for the materials for our DIY projects. Whilst the grounding of Ever Given, the container ship-shaped stopper in the Suez canal,  adversely impacted on global trade, meaning some did not get their new TV for some time.  There’s no doubt that global supply chains have become increasingly fragile, affected by, amongst other things, shortages, health crises and a rising number of cyber attacks.
When it comes to businesses, all too frequently we find that neither suppliers nor customers fully understand or appreciate the contractual arrangements they’ve signed up to.  Clearly, it’s critical that all parties in the supply chain understand the relevant contracts, particularly when market conditions remain so turbulent.
There have been many instances where businesses trading internationally have fallen foul of Incoterms by using the wrong set inadvertently.  A simple three-letter code has the capacity to make life very difficult, and expensive: EXW, for example, shifts much of the pain to the importer whereas DDP directs it to the exporter.
Some businesses wrestled with force majeure provisions in the run-up to Brexit and under multiple lockdowns; the ongoing pingdemic here in the UK hasn’t provided much relief either.  We have also seen clients struggle to claim additional costs when forced to source products from alternative suppliers because that liability has been excluded under the relevant contract.
The key takeaway – reinforced  by recent experience - is to understand your contracts and what you have committed to.
There are clear pinch points to be aware of, many of which you can plan for:
  • Are you locked into an exclusive arrangement?  Perhaps, a supply network would be more beneficial than a supply chain.
  • How can you end the arrangement if things are not working out?
  • Can you source from elsewhere and recover additional costs incurred? 
  • If you do incur additional costs due to supply chain issues, can you pass those on to someone else in the chain (upstream or downstream)?
  • Is your supplier required to stock minimum stock levels regardless of whether you order or not?
  • What is within or without the force majeure provisions (it would be exceptional for Brexit to be included but typically normal for pandemic and epidemic to count as a force majeure event)? 
  • What is the position on the parties’ liabilities – what can be recovered and what can’t?
  • Who is responsible for import and export duties and insurance?
Lessons in (supply chain) life
  1. Build flexibility into your contracts.
  2. Invest time understanding the issues you may face and reflect that understanding in your contracts.
  3. Be prepared to compromise; not everything will go your way, but a successful negotiation is one that is a win-win for both sides. You may find giving a little means a lot to the other party.
There is a great deal of debate within the supply chain industry about resilience, stress testing and supply networks rather than chains becoming the ‘norm’.  That debate is set to continue, fuelled by the experience and learnings of the last 18 months. There is a clear need for change and the starting point for many may be to look afresh at supply chain contracts.

If you need assistance with any issues concerning contracts, please do get in touch with one of our experts in the Commercial team.

Further reading

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Reversal of changes to High Net Worth Individual and Self-certified Sophisticated Investor criteria implemented

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As discussed in our recent update, the government announced in the Budget that the eligibility criteria for the exemptions, which allow shares and other financial instruments to be marketed to High Net Worth Individuals and Self-certified Sophisticated Investors without the regulatory protections
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FCA to investigate personal guarantees in small business lending following a super complaint

The FSB has raised concerns that the demand for personal guarantees by lenders has a detrimental impact on small businesses accessing borrowing to grow
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ECCTA: Fundamental changes for companies and considerations for lenders: Practical points to note

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