May 27, 2020 |
In recent years, many companies have “leaned out” their supply chains, negotiating enterprisewide arrangements with suppliers and service providers to reduce costs, turnaround time and on-hand inventory. While these changes have generated efficiencies and improved profit margins, they have also increased exposure to supply chain disruptions like the ones currently being caused by the spread of COVID-19 and the governmental responses to contain it. Examples of significant supply chain disruption are rampant in today’s news — from the oversupply of oil, to the “mismatch” of commercial v. consumer supply of toilet paper, to the deficit in processing capacity in the dairy and meat industries. So how can companies anticipate and mitigate supply chain issues in the current environment before they become critical?
Start with demand. Any thorough evaluation of an organization’s supply chain starts with an analysis of demand. I have seen far too many companies beat up their suppliers for products that they ended up not needing and/or not being able to pay for because they failed to first do a rigorous reevaluation of their customers’ short- and long-term demand for their products or services. Order history is no longer indicative of future demand; most smart companies are throwing out their forecasts and starting from scratch.
Talk to your customers. It sounds obvious. But many companies seem reluctant to engage their clients, particularly around the issue of existing orders, for fear that the customers will see these conversations as an opening to cancel or defer those orders. To me, this is the functional equivalent of crossing your fingers and hoping for the best. I believe that companies taking this approach run a higher risk of not getting paid for the products/services they deliver (which is usually a worse result than a cancelled order) and, more fundamentally, miss the opportunity to elevate the customer relationship. The current situation — while fraught with risk and uncertainty — is also a great opportunity to show your customers that you value the relationship more than the current order. Being willing to have open, honest conversations with your customers about their current demands and challenges, and offering to help in tangible ways, can elevate your company from a vendor to a trusted business partner.
Ask for, and be willing to grant, accommodations. Some customers may be facing the difficult choice of whether to pay their suppliers (like your company), their employees or their landlords. Maybe your company is in the same situation. In these cases, it is always worthwhile to request an accommodation — or, if you are on the receiving end of such a request, to consider finding an accommodation. The pandemic has had massive adverse impacts on the global economy. Everyone is struggling. You have a choice — to hold customers and suppliers to their contractual obligations, or to work with them to find compromises, where possible, that allow both of you to meet your most critical needs. Whether it is the deferral of payment, delay of delivery, substitution of a less expensive product/service, or some other accommodation, this is an opportunity to demonstrate your creativity and flexibility.
Understand, but do not blindly rely on, your contractual rights. Contracts are only as good as your willingness and ability to enforce them. In most cases, enforcement requires litigation — or at least arbitration — which can be costly and time-consuming. Lawsuits that would normally have been straightforward may be complicated by defenses based on force majeure or impossibility caused by the pandemic. In cases where the amount due is relatively small, the costs of enforcement may outweigh any possible recovery. And, at the end of the day, you may win your case, only to find that the other party cannot pay. The reverse is also true — even if you are obligated to pay or otherwise perform under a particular contract, it may be not worthwhile for the counterparty to that contract to try to enforce that obligation against you. So, while it is important to understand your contractual rights and exposure — if for no other reason than to understand the parties’ respective leverage — it is unlikely that a written contract alone will be dispositive of the situation.
Treat your suppliers the way you would like your customers to treat you. As a service provider, I know first-hand what it is like to be treated as a vendor and, conversely, like a trusted business partner. While I always put forth my best effort on behalf of all of my clients, it should come as no surprise that I am willing to go the extra mile (and make necessary accommodations) for those who treat me as a trusted business partner. Be honest and transparent with your suppliers. Tell them directly what you need from them. If they are willing to accommodate you, make sure you hold up your end of the bargain. If they are not, consider your alternatives.
Do your diligence. Track developments in your customers’ and suppliers’ industries and geographies. Stay alert for signs of financial distress — both the obvious (e.g., late or missed payments) and the more subtle (e.g., loss of transparency, lack of responsiveness). Request assurances of ability to pay when appropriate and, if such assurances are not forthcoming or insufficient, tighten or eliminate credit (subject to appropriate accommodations, where possible). Identify and diligence potential alternative sources of supply well before you may need them.
Coming out of this pandemic, there will be supply chain winners and losers. The companies that prevail will be those that use the current situation as an opportunity to build and elevate relationships — that demonstrate in tangible ways the value they place on their customers and suppliers, and the value they bring to these relationships.
• Deborah L. Spranger, Partner
Compliments of Pepper Hamilton – a member of the EACCNY.