Supply chain risk and increased costs

Supply chain issues are not new, but after the lifting of coronavirus restrictions in the UK and hopes that UK businesses will recover from a prolonged period of trade suppression (or no) , they have a huge impact on the recovery.

The disruption, delays and rising costs have been compounded by the pandemic. But these issues have arguably been highlighted even more now that business has reopened and the real impact of the UK’s exit from the EU is being felt. Indeed, supply chain challenges are currently at the top of many C-Suite agendas, having recently caused high-profile operational disruptions and lost sales for a number of well-known brands: such as McDonald’s, IKEA, Nandos and JD Wetherspoons. to name a few.

What do we see and how are companies tackling these issues?

As restrictions began to lift in the UK, demand for goods and services rose sharply, significantly outstripping supply and production. Shortages of raw materials, labor shortages, rising energy costs, lack of CO2, and transportation and logistics issues have since compounded the problems. As we have seen recently with fuel, a shortage of truck drivers has caused major logistical problems, the lack of drivers creating delivery and therefore a shortage of supply to bring certain products to the market.

Rising container costs and delays in ports have also had an acute and continuing impact on world affairs. Companies that depend on imported materials, components and goods have not been able to obtain them or are receiving deliveries much later than expected. This in turn creates production and inefficiency issues, affecting planning and distribution, as well as the ability to meet contractual obligations and commitments.

The Drewry Shipping Index, which measures the cost of containers, recently confirmed[1] the clue is up 291% compared to a year ago. Busy journeys, like that from China to Europe’s largest port, Rotterdam, have seen freight / container shipping costs increase six-fold in the past year alone. Global container demand is also on the rise: 20% in 2 years[2], associated with an excessive global dependence on maritime transport. Delays, traffic jams and closures at ports have exacerbated the already rising costs. These aren’t just problems for the UK, with delays at overseas ports and increased freight costs affecting businesses in many other jurisdictions as well.

While, for the UK at least, it could be due to leaving the EU and increasing border controls and post-Brexit paperwork, not all problems are Brexit related; elsewhere, many delays and blockages have been caused by slow bureaucratic processes, stacking of containers and a general lack of manpower, including heavy truck drivers[3], to shift them.

Supply chain issues are not industry specific and affect all businesses, although sectors such as automotive and construction are two areas particularly affected in recent times.

Construction suffered from shortages of raw materials (wood, paint, cement, etc.) and automobiles with a shortage of key components, such as semiconductor chips, which shut down production lines. The automakers that fared better than others in the face of such shortages were the ones able to stockpile components and build up inventory (just in case rather than just in time), enabling them to solve the problems of the market. ‘supply ; but to do this, these companies needed increased storage capacity and working capital exactly when others had to stop production.

Companies are trying to strengthen supply chain resilience and security of supply, in particular by removing weak links. In some cases, strong businesses can overcome stress – the storage example given earlier is a case in point. However, we are seeing a growing shift towards risk mitigation measures such as dual sourcing, local, regional and near in some cases; as well as better mapping / monitoring (eg red flags), simplification and optimization of supply chains in many cases. This helps reduce the impact of volatility, delays and supply chain disruptions, especially when materials and goods come from further afield using longer and increasingly reduced supply lines. .

Local sourcing of products also helps companies achieve their ESG (environmental, social and governance) objectives. .

In addition, the shift to automation, robotics and the digitization of supply chains is helping to reduce costs and labor shortages, which is not a problem only in the UK. (where a large number of workers did not return from the EU after Brexit and the “demies” ping, induced work restrictions, etc.), but also in other countries.

Due to a growing cost base, fixed price supply contracts cause trade tensions for some suppliers. Being tied to non-competitive contracts and the impact of delays manifests itself in penalties, damages claims and price / other contract disputes. Suppliers and end customers are increasingly dusting off their agreements to see if they have contractual levers / protections against rising costs, such as the ability to raise or resist price increases. Others are trying to renegotiate terms or are considering termination options.

Longer term, we are also seeing supply chain partners looking to work together in a more collaborative way (an extension of the ‘everything in one set’ mantra), through increased sharing of information that can help demand planning and data analysis to monitor risk. But such measures can lead to legal issues, including data privacy and potential competition complications, when sharing such detailed procurement data. Nonetheless, despite legal and other risks, the increased use of AI and digital twin technology (primarily to aid in planning and modeling disruptive events) is likely to continue to gain traction as a solution to problem solving. supply chain futures. To learn more about this topic, click on this link: AI fixes for supply chain bottlenecks carry legal risks

In addition to seeking to build resilience by localizing and simplifying supply chains or reducing costs through automation, even in the best-planned cases, a business can still experience unexpected stress or shock from the business. supply chain through no fault of its own. This could be due to the downfall of a major supplier or customer, or (hopefully not) an almost instant cessation of trade following a future pandemic. However, when a business is affected, directors must ensure that they continue to comply with their duties as directors and take advice as needed. Early advice can often lead to preserving the value of a business that is eroded by external threats such as delays, disruption and supply chain costs. To access our quick guide to director functions, click here.

[1] September 30, 2021

[2] WTO.

[3] For various reasons such as ongoing Covid restrictions (e.g. license renewal / testing), disputes over wages and conditions, lack of EU nationals in UK and aging driver population , etc.

© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume XI, number 329

Source link