COVID-19: The Impact of Supply Chain disruption on Businesses – The Way Forward

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By Frazer Hunt, Partner

For many years, organisations have relied on global, inter-connected and lean supply chains to improve their margins through increased supply chain efficiency. However, the disruptions caused by the coronavirus have exposed supply-chain vulnerabilities previously unseen.

Almost overnight, we experienced a range of major disruptions in transport and logistics services, including flight cancellations which restricted air-freight capacity, refrigerated containers were held at ports and not returned to global circulation, labor shortages, temporary closure of ports, and slow customs clearance as countries attempted to stem the spread of the coronavirus. This, in turn, delayed production of goods and consignments that were already in transit were delayed, rerouted or discharged short of their final destinations.

As many importers and exporters have found over the last couple of months, loss and damage to cargo arising from such delays are generally not covered by cargo transit insurance, and the carriers and freight forwarders who are responsible for transporting those cargos have been able to exclude their liability for losses caused by any delays, leaving the cargo owners between a rock and a hard place.

We have seen a significant increase in claims involving abandoned cargos as stakeholders have become insolvent and gone out of business and disappeared, which have also resulted in disputes involving container detention charges and demurrage. Further, as shippers and receivers feel the financial strain by this disruption, delays in payment of their accounts with carriers have resulted in those carriers exercising liens and holding cargos to ransom until they are paid.

From a logistics perspective, the availability of many consumer items was disrupted though panic buying, impacting the management of supplies and inventories for distributers with the normal flow of products through the supply chain unready for the unanticipated increases in demand.  Although suppliers of goods and logistics providers have largely adjusted to the short term spike in demands for certain products, in the longer term, a significant event like this global pandemic will lead to adjustment of consumer behavior that will last well into the future, and with the new ‘normal’ creating opportunities for those who can predict emerging trends.

As we begin to emerge from the current crisis, with the gradual removal of restrictions in the movement of goods and people, now is the time for businesses to focus on identifying risks and to create strategies to address supply chain vulnerabilities, including reviewing their transport and logistics systems and their contracts.  These businesses will need to become more flexible and resilient as the world settles into the ‘new normal’ which will be different to pre-coronavirus ways of doing business.

So what do businesses need to do now to ensure that they manage their supply chains moving forward?

  1. Review your current supply chain end to end, including alternative sources of supply and routes, and the security and flexibility of your supply chain as conditions change.
  2. Assess availability and level of inventories, including spare parts, after-sales stocks and anticipated delivery times.
  3. Until a vaccine is found, continue to monitor infection prevention measures, not just from employee safety perspective, but also in the context of capacity and output that will be affected by such measures.
  4. Identify changes in customer demand both in the increased availability in goods that were in short supply and whether the demand will change in the longer term.
  5. Review capital and cash flows to ensure that future spikes and troughs in demand for your goods and services can be accommodated.
  6. Re assess the changes in your processes that were implemented during the crisis that kept your business running, which generally increased digitalization, meeting platforms etc. Can some of these be retained to increase efficiency?
  7. Review your contracts with your suppliers, customers and logistics providers, particularly in light of the disputes that arose as a result of the disruption to supply chains.

Many contracts include ‘force majeure’ clauses and termination clauses, but whether such clauses can be relied upon to excuse delays in performance of the contract or the ability to cancel it depends very much on the wording of the clause and from what we have seen, few such clauses have been drafted to address the fallout from the effects of a pandemic such as the coronavirus.

Unless you can be satisfied that there will not be a second wave of infections with re-imposed restrictions and/or new pandemics in the future, now is the best time to step back and review the robustness of your business.

For further information, please do not hesitate to contact us.

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