4 Ways to Safeguard and Stabilize Your Supply Chain
Stabilizing core business operations, managing risk, and taking steps to perfect and enforce rights under existing agreements and insurance policies should be key priorities at this stage of your company’s response to COVID-19. Here are four strategies for supply chain professionals, in-house counsel, and risk managers to keep in mind as they work with their commercial teams to develop and safeguard secure and reliable supplies of critical inputs. The analysis takes into account how changing market dynamics in some cases creates flexibility to address immediate supply chain challenges and in other cases cautions against departing from historical practices.
1. Aggressively Collect and Leverage Competitive Intelligence
Companies are generally free under the antitrust laws to pressure suppliers to be forthcoming about production capacity, possible disruptions, and other market insights. Companies also have the ability to pool information with buyers, shippers, and other market participants as long as they implement the necessary safeguards to protect against unlawful price effects and coordination.
The safeguards needed to mitigate the antitrust risk associated with information sharing will vary depending on the nature of the information to be exchanged, the competitive relationship and market shares of the parties involved in the exchange, and other factors. However, with strong economic headwinds and consumers facing product shortages, we do not expect regulators in the United States to challenge collaborations that take reasonable precautions to prevent harm to competition even when they fall outside historical safe harbors.
Companies ignoring information deficits face significant short-term and long-term risks. Financial distress caused by COVID-19 may prompt some firms to engage in high-risk business practices at the very moment when information is incomplete and changing rapidly. Other firms will permanently harm their market position by allowing risk aversion to delay or avoid difficult decisions. Neither outcome is optimal and suggests that exploring new data sources should be an important priority.
2. Collaborate with Other Industry Participants to Shore Up Supply Lines When Possible
McKinsey recommends that companies attempt to alleviate shortages by seeking new suppliers and “prebooking freight capacity, stocking up on critical parts, purchasing components that their direct vendors might need, and making plans to leverage existing aftermarket inventory.”
In addition to unilateral steps, companies should explore collaborations with other market participants, including their competitors, when consistent with applicable antitrust laws. The agencies should give favorable consideration to joint efforts to improve supply conditions necessitated by the current national emergency, particularly when they involve critical industries.
Areas where a collaboration among competitors may offer cost containment opportunities and other efficiencies related to supply chain management include group purchasing, joint sourcing of logistics and transportation services, joint sponsorship of a new entry in the supply chain, and benchmarking and other data collection. The details of any of these potential opportunities should be fully vetted by antitrust counsel to ensure compliance with the antitrust laws before any joint action is taken.
3. Expedite Onboarding for New Suppliers
With product quality at stake, companies generally should not lower qualification standards for new suppliers. For companies with supply chains stretching across continents, the serious consequences associated with violations of United States sanction regimes and other anti-terrorism laws also demand no shortcuts be taken.
Remember that stretched supply lines and the resulting pressure to meet internal supply needs create opportunities for fraud and corrupt practices by third-party opportunists, actually increasing the need to conduct efficient and effective due diligence to meet this heightened risk. Still, opportunities may exist to conduct diligence efficiently by prioritizing the vetting of references and collaborating on diligence investigations with other potential buyers. We also continue to make ourselves available to clients who need rapid first-level due diligence.
Companies also should expect the United States in the short and long term to implement new trade restrictions and modify others in response to changing global events. Some adjustments may stabilize or open trade channels. Others may have the opposite effect. The inability to predict future foreign policy events should prompt companies to build in as much flexibility and redundancy in their supply chains as possible. Having secondary and tertiary suppliers fully vetted early will help mitigate supply chain disruption and compliance risk.
4. Track and Anticipate Supply Chain Impacts of COVID-19 Containment Measures
In response to the spread of COVID-19, the United States and other countries have implemented travel restrictions and limited carrier activities in and out of impacted regions. Saudi Arabia, for example, now prohibits the arrival of airline flights and vessels originating in or passing through airports in several countries including Italy and Korea. Over the next year, these restrictions are likely to grow in number and change as countries report first and second wave outbreaks.
Domestically, state and local curfews on nonessential, nonemergency travel are slowing down truck shipments. These delays are expected to grow in the short term if, as expected, additional states implement restrictions in the coming week, shipping resources are diverted to critical infrastructure, and China ramps up exports.
How containment measures will impact your supply chain will depend on your unique circumstances, but all businesses will benefit from maintaining a threat map that identifies existing and anticipated supply chain impacts. The map will provide your commercial team with the information needed to keep sales and marketing teams informed about product shortages, predict price volatility in freight flows, prioritize the onboarding of secondary suppliers, and identify other supply chain risks and cost containment opportunities.