Poh-Leng Devare recently wrote a piece for The Times of Tunbridge Wells, exploring the options for organisations when it comes to supply chains.
Supply chains have been, and continue to be, disrupted by a range of factors. Rising demand for oil after lifting of Coronavirus restrictions means higher fuel prices. The pandemic has also made demand forecasting very difficult. There are staff shortages across many sectors with claims that the UK is short of 65,000 HGV drivers. Not to forget the combined effects of Brexit and the Suez Canal being blocked for six days earlier this year.
Given the uncertainty, understandably business owners are thinking about better ways to protect their supply chains. We have set out below some key areas that business owners should consider when negotiating and reviewing their supply contracts.
If you are a buyer you may wish to negotiate that you pay on receipt of goods rather than pay fully up front. If you have paid up front and your supply fails then it might be difficult to get your money back. If you are a supplier then of course, you might prefer being paid up front to pay for unexpected delivery, storage or insurance costs or to avoid the risk of your buyer becoming unable to pay. Parties may wish to try and balance risk by negotiating a middle ground such as staged payment dates.
Force Majeure clause
The force majeure clause says what happens to the parties’ obligations if an extraordinary event occurs, particularly where this is outside of their control. For example, you probably wouldn’t want to be held to your obligations if your business was destroyed by a storm or terrorist attack or if you could not provide goods or services due to a pandemic. Read force majeure clauses carefully to see what may still be expected of you if an extraordinary event occurs.
Length of supply chain
The longer your supply chain, the more risk of disruption along the way. Supply chains can be extensive and pass through many different jurisdictions. Further, insolvency practices vary in different jurisdictions. Knowing the limitations of different countries’ regimes can help you pre-empt issues, allocate risk and formulate coping strategies.
It is harder for some businesses to find alternative suppliers than others. Specialist industries will have fewer suppliers of parts which may be bespoke and only created by key machinery, or may not be reproduced elsewhere due to intellectual property protection. These considerations should be made well in advance in order to strategise for when supply chain issues hit.
If you are a buyer then you should check contracts to ensure you have rights to seek alternative suppliers if the other party cannot comply with its obligations. You wouldn’t want to be tied in to one supplier who can’t supply you!
Where supplies are volatile, prices will be changeable too. A business buying goods will want to cap a price over a period to avoid hikes. On the other hand, a supplier will want to ensure that a price covers extra costs that may be associated with demand spikes (they might need to seek their own alternative, pricier suppliers). As with all contract negotiation, it will be a matter of finding a middle ground that suits both parties as far as possible.
If you have any questions regarding the above, please contact Poh-Leng Devare on 01892 510000 or email@example.com.
This article first appeared in The Times of Tunbridge Wells.