In this excellent article by Martin Thomsen (CEO of Rubix) (see the link below), he rightly points out (in my view) that the traditional global business supply chain is no longer fit for purpose. The Covid-19 pandemic has disrupted and, in some cases, cut supply chains exposing business both to dramatic losses and potential litigation. This situation is serious but it also an acceleration of the trend of the last 15 years towards increased volatility in the global economy, and it is clear that we can no longer rely solely on extended and singular global supply chains - the diversification and broadening of a business’s supplier portfolio is now essential to reduce risk, and a new balance needs to be struck between supply chain agility and efficiency.
While this supply chain reformation is now necessity, there will still be manufacturing concerns about how diversification may affect issues such as product consistency, and compliance with regulation and standards, but many of these problems can now be overcome by advances in technology, such as Digital Supply Networks (DSNs) which are themselves largely enabled by IoT based technology and are intended to ensure supply chains are both agile and efficient. Traditional overseas trade finance models are now also replaced by new digital models making cross border business swifter and more reliable.
From a legal perspective, there may also be concerns that diversification creates legal risk but that can also be addressed. In particular:
Properly negotiated and constructed contracts can and should provide clauses offering contractual termination or variation options, and a means of privately and/or constructively resolving any dispute, all of which should take account of any financial, environmental and political risks in any jurisdiction.
Uncertainty and lack of experience in operating across a series different jurisdictions can be mitigated by basing all supply contracts upon a set of laws as applied by a single experienced jurisdiction – for example, businesses are generally free to agree that law and jurisdiction of England and Wales (or any nation) will apply to a contract irrespective of where either or both parties are based. While the enforcement of a foreign court order in a local jurisdiction is by no means guaranteed, obtaining advice on that issue pre-contract is simple.
Standard agreements covering a series of suppliers of the same product or a wider DSN could allow purchasers firstly to ensure and set out how their selected suppliers collaborate for the purpose of product development and manufacturing consistency and deal with issues such as who owns the data generated by the network and whether participants can use it for their own purposes. Secondly, they will allow purchasers to offer transparency in terms of the treatment and demands on suppliers (and the effect on price) in both good times and bad.
Admittedly, getting all of the above is traditionally the domain for blue-chip companies with strong bargaining power and/or advanced in-house counsel teams. But again, that may no longer be the case as certainty in all of the above areas should be in all parties’ interests and supply chain is increasingly becoming a major item on the board agenda – as the world becomes more uncertain, it is imperative that we have more certainty in our contracts. As such, the use of and time allocated to developing and negotiating more considered supply chain contracts should not be controversial and common ground should be easy to find.
By the end of the pandemic, every business on this planet will have been affected profoundly and will appreciate that the business landscape has changed. That change of both mind-set and economic dynamic represents an opportunity for business to refresh existing supply chains and to build new supplier relationships without causing offence and risk of further dispute. Business should therefore move fast and not waste that opportunity.
Companies will have to reconsider the list of critical supplies that they require to operate. They will need to ask themselves whether they have access to the right supply networks to source these products. It is time for global business to bring new thinking to the supply chain questions that the pandemic has posed, and to find answers that are both sustainable and resilient. Only if we do this work now will we be better prepared for the next crisis.