In our recent webinar on supply chain challenges, active management of relationships with suppliers and customers was noted as key to resilience to issues that may arise.
When dealing with supply chains, the critical factor for businesses and directors is understanding the contractual landscape and identifying the relevant potential risks or weaknesses which this has created or could create for your operations. This might include financial or operational risks and reputational risks.
Financial and operational risks
The starting point is reviewing your contractual landscape to first understand your supply chain:
- Do you know who all your suppliers are?
- Are any of these subcontracted?
- Do you have a centralised record of the terms which have been entered into with your suppliers?
- Who is business critical?
Once you have understood this initial assessment, for each key supplier it is about assessing some of the following:
- Are you locked into an exclusive arrangement? Would a supply network be more beneficial than a vertical supply chain in certain areas.
- Are they performing?
- How can you end the arrangement if things are not working out?
- Can you source from elsewhere and recover additional costs incurred?
- If you do incur additional costs due to supply chain issues, can you pass those on to someone else in the chain (upstream or downstream)?
- Is your supplier required to stock minimum stock levels regardless of whether you order or not?
- What is within or without the force majeure provisions?
- What is the position on the parties’ liabilities – what can be recovered and what cannot?
- Is the contract being effectively managed in terms of assessment of performance, value for money and utilising the contractual levers available to you?
Reputational risks
Alongside the pure financial or operational elements of the supply chain, attendees at Trowers' recent webinar on supply chain challenges identified reputational risks as a key current consideration.
With businesses in all industries increasing their commitment to ESG and sustainability goals, it is inherent that operational structures should ensure proper protocol as well. This goes to their suppliers also and this does pose a real risk. For example, it would be bad reputationally if a business publicly focussed on its environmental impact did not also ensure its supply chain was environmentally friendly.
A code of conduct is one way that business and suppliers can agree the way in which they will work together. To ensure adherence, then building in contractual or legal teeth to this as part of your procurement contract can often be effective – and allow you to walk away if a supplier is not doing what they have committed to do. When a list of trusted suppliers has been made, it needs to be shared across the organisation. This term refers to the “action of purchasing from suppliers outside the pre-established procurement policy”. Maverick buying can lead to losses and can pose a reputational risk since products might be bought from a supplier who does not meet governance standards.
