As different countries emerge from coronavirus-related lockdowns at different times and different paces, managing the global supply chain and contracts will be no easy challenge.
While suppliers in China may now be ready to resume deliveries, original equipment manufacturers (OEMs) and other tiers of the supply chain may not yet be able to re-open or may simply not have the demand due to the economic climate.
The operations of most businesses rely on efficient and coordinated supply chains. Businesses need to grapple with the challenges of re-aligning supply and demand to balanced levels as different parts of the world begin to return to something approaching normal.
Re-engaging with your customers
Re-engaging with your customers promptly will be critical. Businesses will want to get early insight into their customers’ likely demand curve and forecast requirements. Bear in mind that this could be a significant shift from pre-pandemic order levels - either up or down - and there may be bumps in demand depending on how the customer, and its own customers, are returning to trading.
Clare Francis
Partner
Businesses need to grapple with the challenges of re-aligning supply and demand to balanced levels as different parts of the world begin to return to something approaching normal.
Ongoing, pro-active account management will not only help you to manage demand but also gain a competitive advantage. Sales or account teams may need additional training and guidance to ensure that they are serving customers consistently, and that the information flow within your organisation is efficient.
Once you have established who your most significant customers are and have resumed contact with them, you should consider the overall terms of that relationship and whether any adaptations need to be made. These might include:
- a change in payment terms or pricing - customers may have requested longer payment terms. Can you offer a discount to those that pay faster in order to maintain cash flow?
- contract levers - are there terms in the contract that enable you to pass through price increases or apply an indexed price increase? Businesses will need to consider carefully when to apply these. If you pro-actively decide not to apply price increases at this stage, consider whether you want to reserve the right to do so at a later date;
- delivery obligations - are the contract terms still applicable? Do longer lead times need to be agreed for an interim period? Where a customer requires expedited delivery, is there an option available for this and, if so, on what terms?
- forecasting - customer forecasts will be critical for business planning. However, for businesses that are gradually returning back to full capacity, it will be important to consider what the consequences will be if the forecasts cannot be met. If contracts provide for liquidated damages or other remedies, these will need to be carefully managed;
- force majeure notices. Where your business has served force majeure notices on customers during the pandemic, you will need to ensure that there is a process for ‘re-starting’ the contract and promptly resolving any issues that have arisen.
Re-engaging with your suppliers and supply chain
You will also need to re-engage with your suppliers. In many businesses, an effective and efficient supply chain is critical to the success of the business and its ability to meet customer demand.
Identify your critical suppliers. For each one, you will need to assess how that supplier has been affected by the pandemic and what its position is now. For example:
- suppliers ready to perform - some suppliers will be ready and willing to perform. They may be located in or source from an area that was impacted earlier in the pandemic, such as China, or an area that was less affected. For these suppliers, you will need to manage volumes carefully to ensure that supplies flow into the supply chain in appropriate volumes and at the right time;
- suppliers still impacted - other suppliers will not be able to or not be ready to re-open as yet. Even when they do re-open, they may have a significant backlog of orders and need to work out which customers to prioritise. Good communications and a willingness to be flexible will help ensure that you are at the front of the queue. For example, can you pay faster in order to secure the stocks that are available? Can you arrange collection for delivery, rather than rely on the supplier to deliver? Where some of these things are outside of existing contractual terms, a strong collaborative relationship with suppliers is likely to enable you to start sales earlier and build longer, more sustainable relationships with your supply chain;
- suppliers that are overstocked - in some industries, there will also be suppliers that are considerably overstocked as we return to work. Many businesses in the UK were already holding high stock levels as a result of their business planning for Brexit, or may have continued to produce with slow sales where they were not impacted by the Covid-19 pandemic until later. If your suppliers are in this position, can you relieve them of some stock in exchange for lower pricing?
It will be important to get an accurate picture of your suppliers’ ability to perform across the supply chain quickly. If 90% of the supply chain can operate but the 10% that can’t includes a critical component, this can still grind your business to a halt. Alternative options may need to be considered quickly.
Once back up and running, it will also be important to manage the supply chain on an ongoing basis. Many businesses will have been significantly squeezed as a result of Covid-19, and supply chain failure will remain a risk to businesses going forward. See our Out-Law guide: Coronavirus: managing supply chain failure risk as lockdown eases.
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