The impact of COVID-19
Given the effect that COVID-19 is having on all aspects of life, it comes as no surprise that supply chains are being disrupted, both in the UK and globally.
In this article, we consider the risks posed to supply chains and the issues which businesses should consider.
The continuing spread of COVID-19 and the measures to reduce its impact, are affecting:
- Goods: Movement of goods is being disrupted, both by government restrictions and by a lack of labour. Businesses that depend on severely affected areas such as China for raw materials and finished products are likely to be heavily affected.
- Labour: There is a lack of available workers due to factors such as restricted travel, self-isolation and illness.
- Services: Again, the lack of free movement will impact companies who provide services if they need their workers to move in and out of affected areas. Many businesses may not be able to provide their services due to lockdown restrictions (e.g. cleaning companies which provide their services in peoples’ homes).
Firstly, it is important to note that there is no “one size fits all” approach to managing these issues. Different industries are likely to be affected in different ways. That being said, it is important for all businesses to assess the risks that COVID-19 presents to their supply chains and their ability to meet their contractual obligations.
Stock shortages in supermarkets caused by a sudden surge in demand, have highlighted the vulnerabilities in the “just in time” supply chain. A system where stock is held for a matter of days before it is sold did not stand up well to a sudden spike in demand.
In other industries, demand will inevitably and significantly fall. For example, bars, restaurants hairdressers, cinemas etc. However, there may be opportunities to adapt e.g. restaurants that now operate on a delivery only basis or affected businesses that are now able to provide a purely online offering.
Before considering specific legal issues and contractual arrangements, it is important for businesses to understand where their potential vulnerabilities lie. As a first step, businesses should undertake a “mapping exercise” of their supply chains for existing services, goods, suppliers and customers.
Mapping the supply chain
It will be important for businesses to map their supply chains to identify key risks in order to the meet the challenges posed by COVID-19 head on. Issues to bear in mind whilst mapping the supply chain include:
- Business impact: Consider what is critical in the supply chain and what is essential for delivery of products and services. Identify whether there are any backup plans which can be implemented and what insurance arrangements are in place to cover potential losses.
- Location: If suppliers are in locations, or reliant on goods from locations which are significantly affected by COVID-19, supply chain disruption is more likely. Additionally, businesses with a single route of supply are likely to be more affected than those with more diverse supply chains.
- Diversification and Substitution: Consider whether goods could be sourced from another location or supplier and the cost implications of doing so. Think about whether such costs can be passed on to customers or suppliers. Assess whether it is possible for parts of the supply chain to be delivered or sped up using technology.
- Lead times and communication: Consider which contracts may be affected by delays and closures. Communicate with customers and suppliers about the impact of COVID-19 to prepare for and manage disruptions. In particular, speak to key suppliers to understand the impact of lead times on stockholding, logistics, warehousing and distribution. Consider communications expected from suppliers (contractually or otherwise) about potential impacts. Businesses should act on such communications quickly, particularly, if they state that new terms / variations are deemed to be accepted if no response is provided.
- Opportunities: Assess any opportunities that COVID-19 creates. The nature of these opportunities will depend on the business and where it sits in the supply chain. Consider the implications of streamlining and entering into new third party relationships. Implementing alternative cost options and locations may also lead to greater profitability and efficiency. There are also opportunities at the delivery end of the supply chain. For example, a business might have been about to deliver a new product or services to businesses but now it makes sense to adapt this product or services for delivery to consumers. Businesses should also consider developing or strengthening their online offerings in a time when people are restricted from going to physical shops.
- Lessons Learnt: In due course, this pandemic can be used to analyse supply chain procedures and overall resilience. This “lessons learnt” review will enable businesses to identify vulnerabilities and consider how similar risks and events could be mitigated in future.
Another angle to consider might be where the supply chain can deliver, but the customer is not in a position to accept the products or does not need the services because of COVID-19. This will require consideration of the relevant contract and any force majeure provisions. Force majeure provisions do not usually automatically excuse both parties from all liability. For more information on the issues around force majeure, frustration and interruptions in the contractual supply chain, please see our article here.
How can we help?
We can help businesses navigate the legal options and risks by providing practical and commercial advice, whether this be:
- undertaking a contract review to identify issues and advising on what relief may be available under contracts;
- advising a business on whether to rely on force majeure or to terminate or suspend a contract;
- advising on insurance issues;
- assisting with legal claims to enforce contracts and pursue customers for payment; or
- advising on how similar risks could be mitigated in future contracts.
Nothing is certain in these unprecedented times, but this situation can be seen as an opportunity to build better and more resilient supply chains for the future.