Supply Chain – Managing ongoing disruption
A Thinking Business publication.
Supply chain issues are once again hitting the headlines.
At the start of the year, the Swedish homeware giant IKEA complained of ongoing supply and transportation disruptions caused by post-pandemic shortages and global shipping challenges. Bakery business Greggs – alongside a host of other food retailers including McDonald’s, KFC and Nando’s – blamed interruptions to the supply of some of its ingredients a few months earlier on a combination of lorry driver shortages, Brexit and Covid. Meanwhile in the US, a national shortage of baby milk formula has been blamed on overseas supply
issues compounded by a shutdown of a domestic production facility.
While some of the issues impacting shoppers are temporary, such as the fuel shortages experienced in spring 2022, others will be much more difficult to resolve and will require proactive steps to be taken to manage supply chains.
“The shortage of haulage drivers has caused huge issues across supply chains,” says Victoria Robertson, a commercial partner in the corporate practice at Trowers & Hamlins. “It is estimated that the sector needs as many as 100,000 more drivers, and as the average age of an HGV driver is 55, with only one per cent under 25, unless there is a serious and successful recruitment drive this need will only increase as the current workforce reaches retirement age. This together with the additional difficulties for UK companies seeking to recruit EU drivers means that this is a shortage that has no obvious end in sight.”
“Many EU nationals returned to their country of origin when the pandemic began and didn’t return,” says Robertson. “Plus, the pandemic disrupted vocational training in various sectors, with the DVLA suspending tests for new lorry drivers, for example. Historic low wages in some sectors, and changes to IR35 rules, haven’t helped.”
Supply chains have been further challenged by Brexit creating new customs and regulatory checks that add cost and complexity to cross-border movement, and the UK becoming a less attractive destination for EU drivers because most are paid based on the distance they travel and border delays waste time.
It is not just the transport sector where there are staff shortages. In May there were more job vacancies in the UK than unemployed people for the first time since records began, as the unemployment rate fell to its lowest level for 50 years. Around half a million people have left the labour market since the start of the pandemic but job vacancies keep rising, creating unprecedented staff shortages.
Last year, the chief executive of the Food and Drink Federation said the sector was short about half a million staff, while shortages of butchers and abattoir workers have led to hundreds of pigs being culled as animals get backed up on farms. Amazon has ad problems recruiting drivers and warehouse staff, with some of these issues being down to Covid.
Meanwhile, gas prices have risen as a result of the curbs on supply from Russia, there is a backlog of electrical components caused by the closure of factories and ports in Asia during Covid, and global shipping costs have quadrupled thanks to capacity shortages and temporary port closures.
“The ability of companies to source and take delivery of the components they need to run their businesses has become a significant issue,” says Adrian Jones a corporate commercial partner at Trowers. “The private sector is good at adapting to cope with change and we are seeing that now in terms of both diversifying sources of supply and also deeper investigation into supply chains.”
With shortages currently top of purchasing managers’ agenda, it is easy to ignore ESG and the increasing importance that will have for all businesses, whatever their sector or size. Pressure from regulators, lenders, investors and consumers is increasing the scrutiny of the supply chain at just the moment that shortages are diverting attention elsewhere.
It is no longer sufficient to simply ask questions about the financial viability of key suppliers or look at specific issues such as sanctions – businesses are advised to carry out pre-contractual due diligence on supply chain partners as if they were investing into them, particularly with an eye to their ESG compliance. “That due diligence is not a one-off thing,” adds Jones. “It needs to be done when entering into a contract and then reviewed on a regular basis. There are quite a few examples of high street retailers being caught out by discovery of child labour or modern slavery in their supply chain which could arguably have been prevented had they taken a more active approach in monitoring their suppliers.”
When entering into contracts, having multiple sources of key components is one way of building supply chain resilience, but it is also key to ensure agreements include clear and well drafted contract management and governance structures to enable proactive management. A careful review of force majeure clauses can help strengthen protections, while audit rights should similarly be prioritised.
Robertson says: “Ensuring that you are working together with your suppliers in a collaborative way is important, so regular meetings, a clear project board and stated roles and responsibilities are often useful. It should be agreed how often you are going to meet to review the contract, and also what will happen if things go wrong and how you will deal with a breach or any external factors that result in delays.”
She suggests companies consider drafting delivery obligations and setting out what flexibility is allowed, as well as specifying that sub-contractors are subject to approval and requiring insurance at appropriate levels.
If things do go wrong, there should be an ability to claim for reputational damage and consequential losses if delivery delays result in refunds to and complaints by end consumers. “In a rising market, when everybody is doing well, things like limitation and exclusion clauses don’t get looked at particularly hard,” says Jones. “When the music stops and things start going wrong, people start scrutinising those terms. The current challenges being experienced in supply chains should serve as a timely reminder to revisit your terms and conditions and make sure you are not exposed.”
With the UK annual inflation rate also hitting its highest level for 30 years in April, and supply chain challenges pushing up prices globally, more and more companies are adding pricing clauses to agreements.
Robertson says: “That is a big theme for manufacturing contracts right now – putting in basic drafting setting out the circumstances in which prices can be increased.
“That might be as simple as a fuel escalator clause that just passes on fuel price rises, or a clause that allows the supplier to increase the price of the delivered goods in line with the consumer price index. If you’re a customer, you want a clause saying the supplier can offer to supply at a higher price but you retain an option to terminate and source elsewhere.”
With supply chains so heavily in the spotlight, now is the time to get those contracts in order.