Managing the ongoing impact of Covid-19 on supply chains
Most businesses will hopefully have implemented their short-term ‘fire-fighting’ response to the impacts of Covid-19 and should now be looking to establish their medium to long-term plans for continuing to operate in these difficult times.
Managing the ongoing impact of the pandemic on your supply chain will form a big part of this. We’ve pulled together a few key points to consider when thinking about your supply chain.
Mapping your supply chain
We’d recommend establishing your key suppliers and customers by mapping your supply chain (to the extent not done so already). This will help to identify pinch-points in supply, demand and cashflow. Regular forecasting will be important and better-prepared businesses will have put together contingency plans to cater for a failure to supply or a dramatic decrease in demand. Alternative suppliers may be available, though carrying out adequate due diligence on any new suppliers should still be a priority, to ensure that the substitute products or services are up to scratch.
Different revenue streams may become available, to help counter any significant fall in demand for an established product line, and the unusual circumstances may provide an opportunity for you to diversify or outsource / insource parts of the business. The state of your contingency plan will inform your negotiating position in the event of a breach or a request to suspend the contract; you are more likely to be flexible if you know that there is no suitable replacement product or service on the market.
Ensuring good communication
Communicating with important counterparties will be key. Clearly there will be some sensitivity around disclosing significant drops in demand, financial difficulties, or trouble meeting supply deadlines. However, most reasonable counterparties are likely to be open to discussion, given the circumstances.
Trading conditions might necessitate a change to payment terms or delivery dates. Government support packages are available and you should ensure that any suppliers or customers who are facing difficulties are making the most of this support – whether they are doing so will indicate how alert they are to the situation and how much flexibility you should allow in the event of a breach of contract.
Reviewing your key contracts
Informal discussions are important, but these should be backed up by knowledge of your legal standing in the event of a contract dispute. Reviewing your key contracts will allow you to gauge potential liabilities and understand how easy it is for each party to bring the contract to an end. You should also check for exclusivity provisions and minimum purchase (or supply) obligations, which may have particularly adverse consequences in the current climate.
With one eye on worst-case scenarios, you should also be aware of the insolvency provisions in your contracts, which will dictate each party’s rights and obligations if one party enters into serious financial difficulty. Counterparties with a longstanding relationship may explore more formal ways of supporting one another and securing their future relationship, for example by way of debt financing, equity purchase or a collaboration agreement.
Do you need to speak to your insurance broker?
It may be beneficial to speak with your insurance broker, to ensure that you are aware of the extent of your current cover and to explore the possibility of additional policies (e.g. credit risk insurance). Logistics providers should also be consulted, with a view to confirming their continued ability to service your needs. The vast reduction in air travel may have affected some providers, however the burden on domestic suppliers may have been eased by the loosening of certain regulatory restrictions affecting delivery.
If any of these issues have raised any concerns or highlighted any areas you think you need to know more about, please email Tom Rook at firstname.lastname@example.org or call Tom on 07971 118042.