When the COVID-19 pandemic first spread through China, businesses across all industries experienced—and are still experiencing—disruptions to their supply chains due to government-mandated shutdowns. China contributes 28 percent of global manufacturing output, which makes it the world’s largest manufacturer and a hub that many businesses rely on. Although some companies began shifting their suppliers to other Asian countries like India and Vietnam, the global and uncertain nature of the pandemic means that things are constantly in flux.
As COVID-19 cases continue to rise and spread worldwide (currently, 213 countries and territories have reported coronavirus cases), businesses need to ensure that their supply chain is resilient for the short, medium and long term. Whether that’s diversifying manufacturers, or putting together a task force, here is what you need to do to mitigate risks in your supply chain.
The COVID-19 outbreak has affected the supply chain in a number of ways. Some regions like the United States have placed export restrictions on medical goods and supplies to prevent domestic shortages as they battle the coronavirus. Similarly, China has tightened import restrictions on meat, dairy and other food products and now requires companies to certify that their goods have not been contaminated by the disease.
Delays are also common, either due to government-mandated shutdowns like the one China experienced, or because of reductions in workforce, says Riza Buditomo, a partner at Indonesia-based Hadiputranto, Hadinoto & Partners’ Tax & Trade Group.
“We are seeing that there are delays in supplying the product due to the lack of manpower, because now the movement of people is quite a bit restricted,” he explains.
Buditomo adds that factories have also been repurposed to produce critical and in-demand goods like hand sanitizer and personal protective equipment. Fluctuating consumer demand also contributes to the disruptions to supply chains, since it’s difficult for businesses to know when things will reopen, how quickly consumer confidence will return and what they will be purchasing.
When determining how to best fortify your supply chain, the first thing you should do is to review in detail the terms and conditions in all contracts with buyers and suppliers. Doing so will help you map out what steps you can take if you’re dealing with a cash-strapped counterparty, or if you yourself are financially stressed. You can also work with your counterparties to vary your contract (meaning, you make amendments, supplement or otherwise modify your existing contracts)—just remember to document those new agreements.
“It’s very important to have a clear understanding about your contractual entitlements and obligations,” says Kwun Yee Cheung, a partner at the law firm Baker McKenzie. “Look at your options carefully: Is it an exclusive agreement? If so, has an intervening event or a termination right occurred? What are the notice requirements, should you wish to terminate?”
Events of default triggers are generally broadly drafted in a contract, Cheung states. “Does that include a failure to perform?” she says to ask. “There may also be security default, so that’s the other side that you need to be aware of, and are there obligations to mitigate?”
Cheung adds that it’s also important to consider any licenses for tools and machinery. Are the licenses controlled by your supplier, or are they in your control? “Be mindful that you yourself need to make sure that you’re not acting in a way that is inconsistent with the contract terms, to avoid being in breach of contract,” she warns. “It’s only with these options and the legal positions clearly in your mind that you know where you stand, and you’ll have a much better position to decide what to do from a commercial perspective.”
Once you have a clear idea of your legal position, you can move on to determining what the next steps should be. Some questions to ask yourself are: Is the supplier providing a product that is unique and can’t be easily replaced? Looking at economics, is there a real need to look for alternatives so that your business can maintain operations?
There are a variety of ways to tackle it, says Cheung, most of which will be a combination of short, medium and long-term solutions.
“I think, to a certain extent, the answer will depend on the state of the relationship before the current COVID-19 disruptions,” believes Cheung. For instance, if you had a poor relationship with a supplier who does not provide a key product, you may want to look at alternatives. “Maybe [acquiring] the supplier is an option,” she suggests.
In the case that you have a good supplier and are dependent on them, you’ll likely want to work through the disruptions together. “You might want to assist them by making payments in advance, for example,” says Cheung. “Or you might consider investing in the supplier by taking up a stake in its operations.”
While many businesses might have prepared for some level of business disruption, the extent and prolonged period of the COVID-19 shutdowns have distressed many companies. If your business needs an influx of cash to maintain operations, Cheung suggests a few considerations for the short and long term.
“Look at where spending can be reduced and take decisive action quickly, because liquidity and cash to help you through the difficult spot will be very, very important,” she emphasizes. External investors could also be useful. For the short term, Cheung says to look into refinancing and, in the long term, to seek out partners to join and invest in your business.
Cheung adds, “The final point I’d make is to keep an eye on government stimulus packages… It may be quite beneficial to tap into those resources during times of financial stress.”
Whether or not you have a good relationship with your counterparty, it’s a good idea to diversify your suppliers for the future, so that you aren’t overly reliant on just one company or region. If you decide to look into alternatives, Buditomo has a few suggestions on what to consider beforehand.
“If you're redirecting supply to a new market, then there are other questions that you might want to ask—say, for example, is there any free trade agreement that may be applicable for the new contract import? And if so, what would be the applicable rules of origin, and can your goods meet the requirement?” he says. “And if so, how long would it take to get the certificate of origin issue, if possible at all, due to center restrictions are locked down within the country?”
Considering that there is so much turmoil around the world, it’s very important for businesses to remain in open communication with their importers, exporters, suppliers and/or manufacturers. That way, businesses can keep abreast of what is happening, not only with the businesses they have contracted with, but regional events, as well.
“The buyers of the products or the people that have to provide imports—they’re also going to be facing their own supply chain challenges,” says Anne Petterd, a partner at Baker McKenzie. “So I think part of the strategy for managing the COVID-19 supply chain is going to be seeking to vary supply chain terms and engage with people.”
Along with setting up internal communications, Buditomo adds that regularly communicating with “key supply chain participants” is also very useful for getting early notice of important events, such as upcoming regulations, restrictions or reopenings.
Petterd agrees and adds that frequent communication will help with resuming regular operations. “We do need to keep connected as part of being as best placed as possible to reestablish supply chains quickly,” she says.
Countries may have to undergo multiple lockdowns in order to fully contain the coronavirus, which means that there likely will be continued government mandates and restrictions that could affect supply chains at any given time.
“What I would suggest is for businesses to put together a team to monitor changes,” says Ivy Tan, a tax and trade lawyer at Baker McKenzie. “This is meant to be one step ahead of the restrictions, by monitoring a trend so that they can come up with and execute plans quickly in a way that minimizes compliance risk.”
Generally, it’s a good idea to be well-versed in the restrictions imposed in each of your areas of operation, since local laws will likely differ. Tan says that, as soon as restrictions are imposed or lifted, the team should find out what businesses can and can’t do, and whether there are any exemptions for certain businesses or industries, and if so, how to obtain an exemption.
Buditomo adds that not only should you be monitoring your own operations, but you should be examining the supply chain impact on others. He uses the monitoring of government restrictions as an example: “If we focus our attention to the rapid changing of the restrictions, as well as keep updated, it would be useful for us to understand where the government is coming from, and with what will be the government’s next action.”