Supply chains are increasingly complex. Globalisation of markets has led to supply chains which extend across multiple borders and consist of an ever growing number of links. As the pandemic has highlighted, businesses of all types need to take a cold, hard look at risks to their supply chain and to ensure that mechanisms are in place to initially assess and mitigate disputes risk, and to later manage disputes that do arise.
There have been numerous reports on the impact of the COVID-19 pandemic on supply chains. The WHO recently predicted that COVID-19 will extend into 2022 because of the ongoing exposure in emerging markets, and that’s going to keep pressure on supply chains. Equally, there is increasing awareness of the impact that climate-related risks – physical and transition – will have on supply chains. We are already seeing weather-related disruptions to supply chains. In November 2021, a new report by Moody’s warned that critical industries have substantial exposure to physical climate risks in part due to supply chain risks. Among the most exposed are manufacturing, particularly electronic and electrical product manufacturing, but also petroleum and coal, non-metallic mineral products, food and chemicals.
For many in the technology sector, significant portions of their revenue is in regions with high exposure to physical risks of climate change and their supply chains are dependent on resources and regions threatened by climate change. So the exposure is both within their markets and their supply chains. The risk is compounded by the impact climate change will have on international transportation, in particular sea level rise and more frequent and extreme weather events.
This means that the risks to supply chains and the risk of related disputes are not going to go away. Businesses need to prepare accordingly.
Careful advance management these risks is critical given disruption can reverberate throughout the supply chain with significant time, cost, operational and liability implications for all involved.
Accept that disputes are a fact of doing business. Like any argument, how the issue is resolved often has a longer-term impact than the issue itself. A few practical tips are below:
- Know where your biggest risks are. Consider a legal risk audit to identify areas of risk and analyse past disputes. Invariably, patterns can be observed which allows underlying issues to be identified and mitigation measures to be implemented (contractual or practical) to avoid similar disputes in the future;
- Choose the right dispute resolution mechanism and tailor the clause to the parties, your operations and supply chain – international arbitration is often an excellent choice for cross-border, multi-party disputes, especially where emerging markets are involved or where privacy or commercial sensitivity is an issue;
- Consider disputes at the outset – do not leave it to 11th hour negotiations or, worse, after a dispute has arisen;
- Be realistic and put plans in place to ensure that your supply chain can still function whilst the dispute is being resolved;
- Establish systems that escalate issues that might lead to disputes at an early stage – early intervention can often resolve issues prior to it becoming an active dispute;
- Consider having different employees managing the dispute to those responsible for the day-to-day management of the supply chain;
- Have staffed trained and protocols in place that set out what can and can’t be agreed, and who is leading any negotiation or dispute resolution process. Concessions, ‘horse-trading’ or inadvertent waivers of contractual rights pose real risks to a successful outcome;
- Implement robust dispute protocols to take contemporaneous records of what went wrong, where, how, what was discussed or agreed, and to preserve evidence – this is a surprisingly easy fix with big results as it very often leads to a more efficient and effective dispute resolution;
- Be prepared for the other party to be uncooperative – this could range from seeking urgent interim relief to securing alternative supply;
- Don’t take it personally – keep your eyes on the end game and what your commercial goals are;
This is just a brief overview. For further information on managing supply chain disputes, see our full article here or contact the authors.
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