Coronavirus series: building a thriving supply chain

Jayne Hussey discusses the future of supply chains in the first of a series of articles with particular focus around the coronavirus impact and potential opportunities.

#6 Visibility over the Supply Chain: Using blockchain to minimise disruptions and enhance reputation ​

As observed in previous articles, transparency, ethical trade and sustainability are increasingly important to consumers in the purchasing decisions that they make. Equally, coronavirus has demonstrated the fragile nature of many global supply chains. The absence of visibility across supply chains has severely hampered the attempts of many businesses to mitigate the supply chain havoc caused by the coronavirus pandemic.

The complex nature of global supply chains means that the mantra of the importance of having supply chain visibility across the supply chain may sound simple, but the practicalities of achieving this end-to-end visibility and traceability is much more difficult for a business to achieve.

It's in this context that new technologies can play an important role. Distributed Ledger Technologies (often referred to as 'blockchain') and the Internet of Things have the potential to revolutionise the end-to-end supply chain visibility and traceability challenges faced by many businesses.

Indeed, in addition to giving transparency to help businesses to mitigate against supply chain disruption, these technologies can also be used as a tool for preserving and enhancing reputation and ensuring robust ethical standards are achieved through the supply chain. A good example of the use of such technologies is in the cobalt supply chain. Cobalt is a key element used in battery technology. It therefore appears in very many of the items we use every day (for example, mobile phones and electric vehicle batteries). A significant portion of the world's cobalt originates from the Democratic Republic of Congo (DRC) where it is mined by workers (including children) working in extremely poor and exploitative conditions.The IBM blockchain initiative in the DRC involves a range of stakeholders such as Ford. It provides a 'single source of truth' as to the conditions in the DRC mines, thus enabling the participants in the blockchain initiative to ensure that the cobalt they purchase is sourced from mines which operate to minimum acceptable standards. 

The fundamental element of a blockchain is that it creates a 'single source of truth'. It does this by enabling businesses to record events and transactions in a distributed ledger (the 'blockchain'). This distributed ledger is shared amongst the participant businesses and is not 'owned' by any one participant. Transactions and events are then recorded in the blockchain in a secure, fixed and irreversible format.

However, a mindset shift towards a more collaborative way of working is needed if blockchain (and, indeed, similar technologies) are to gain widespread use in supply chains. It requires a level of trust between the participants with respect to the accurate and honest input of data and the purpose for which that data is subsequently used. I have commented in previous articles as to the value that can be gained from adopting a more collaborative approach to supply chain contracting. Achieving greater transparency and traceability through the use of enabling technologies is yet another example of why collaborative contracting will be vital to building a resilient and thriving supply chain going forward.

#5 Coronavirus: An opportunity for supply chain near-shoring?

In an earlier article, I commented on the fact that the coronavirus pandemic has reminded us all of how interconnected and interdependent the global supply chain is. The east-west spread of the pandemic means that no geographical area has been spared from the disruptive effect of the pandemic. We can also expect supply chain disruptions to continue for some time to come, with new coronavirus 'hotspots' being reported and country lockdowns and localised containment policies being implemented around the world on a regular basis. Does this mean that coronavirus could be the catalyst to businesses revisiting global sourcing strategies and placing greater emphasis on near-shoring strategies?

To assume that near-shoring will become fashionable as a supply chain strategy is perhaps too simplistic. After all, it's generally acknowledged that dependence on one or two suppliers is a high risk strategy. The logical extension of this is therefore that having suppliers based in one country or region will naturally increase exposure to disruptions in that country or region. Interestingly, the businesses which appear to have experienced particular challenges have tended to be those which have been heavily dependent on supplies from a particular supplier or suppliers based in a particular geographic area.

In light of this, one might consider that it should be a case of 'carry on as is, albeit perhaps with a more diversified supplier base'. Again, arguably this solution is too simplistic.  To demonstrate this, it's worth considering the common features of those businesses which have responded best to the supply chain challenges caused by the coronavirus pandemic.

Those businesses with supply chain strategies which have mitigated the impact of the coronavirus pandemic most effectively have supply chain strategies with several crucial component elements. These can be summarised as:

  • they have a developed supply chain risk management and business continuity strategy
  • they have diversified supply chains both in terms of geographical spread and the range of suppliers
  • they have implemented systems which give them enhanced visibility across their supply chain (and notably beyond tier 1 suppliers)
  • they have ensured that their distribution networks have sufficient agility to enable them to be reconfigured swiftly as the need arises

Although we will be living with the coronavirus impact for quite a while, successful supply chain strategies will no doubt prove beneficial to a range of both anticipated (trade wars, the end of the Brexit transition period) and unanticipated supply chain disruptions. Spending time and energy considering and developing your supply chain strategy now will prove a valuable investment for many years (and known and unknown events) to come.

#4 Ethical issues around the supply chain

Ethical issues around the supply chain were again brought into sharp focus this week with stories of poor labour practices in the Boohoo supply chain. My colleague, Kimberley Bruce has written this excellent article which considers the importance of embedding ethical labour practices throughout the supply chain.

A bad week for Boohoo: a massive drop in share value and significant damage to reputation as a result of the recent high profile allegations of modern slavery and exploitation at a factory in Leicester which allegedly supplies Boohoo. And all before there has been any conclusive finding of poor and illegal practices on the part of the factory or fault on the part of Boohoo. The garment industry and fast fashion has long been in the spotlight but this week’s news has highlighted that modern slavery/poor and illegal working practices is still a prevalent issue and that corners are being cut in terms of protecting workers at a time of a global pandemic. Businesses may now be at risk, as a result of such widely publicised allegations, of paying a heavy price for not keeping as close an eye on their supply chain and question whether that price is, and will be, higher in a post coronavirus world where we start to look at how businesses have and continue to behave in respect of workers and their safety and make our buying choices on an ethical basis.

The driver for contracts with suppliers is very often to find the best price, especially when we enter one of the most severe recessions this country has faced.  However, the recent allegations go some way to show that this is not the only driver that needs to be considered. Squeezing a supplier too hard on price can impact other areas, such as compliance, which in turn could result in the business losing a lot more than the price saving made. If it sounds too good to be true, it probably is and businesses and consumers alike need to address that issue together.

Implementation of anti-slavery policies, codes of conduct and contractual provisions are an obvious and predominantly used method of demonstrating compliance, but as the recent allegations have highlighted, more needs to be done to ensure those policies and contract clauses are effectively managed within the supply chain.  It is all very well to put a clause in a contract but how pro-active are you being about managing that obligation and making sure all is well? 

What does this mean for businesses and how might you look to strengthen your chain?

  1. Due diligence – Find out what your supply chains are doing to comply with anti-modern slavery requirements and working practices and policies, as well as legal requirements more generally. This information will also help to inform the slavery and human trafficking statement required from many businesses, for each financial year, by law. Get to know who you are dealing with - and this may be wider than simply the next tier down.
  2. Assessments - Assess the risk areas and be effective in managing those risks. You probably cannot monitor all of your supply chain but you can monitor those you have identified as high risk – the Leicester garment industry has been in the press before for its working practices so arguably a greater focus should be on that area if you are trading in that sector.
  3. Pro-activity – Enforce the policies and contractual provisions which require the prevention of slavery and human trafficking and poor supply practices. This will help to flush out the weak links and allow issues to be identified and addressed before they become headline news.
  4. Consistency – Ensure that the steps taken to strengthen compliance in the supply chain are consistently applied, measured and policed each year, not just when high profile allegations arise. At that point, it is too late.

Complete compliance requires all elements of the supply chain to collaborate together for the purposes of effective communication and transparency, with each part dependent upon the next. And if there is an issue/an issue which has not been resolved then bottom line does your contract allow you to say, in the words of Ann Robinson “You are the weakest link.  Goodbye”. If not, you could pay a hefty price for another’s failings.

#3 Coronavirus: An opportunity for collaborative contracting?

Of the many lessons we've all learnt from the coronavirus pandemic, one of the key lessons must be the reminder of just how interconnected and interdependent the global supply chain is. The domino effect of plant closures and reduced shift patterns to accommodate social distancing has resulted in supply shortages felt across the globe and across sectors. It's clear that a successful recovery cannot be achieved by one tier of the supply chain alone. A strong and positive recovery depends on ensuring that there is a resilient and agile supply chain in place, taking into account all tiers of the supply chain. Not just that, but a supply chain that works together to give greater visibility and support to one another will lend itself to a sustainable recovery which will benefit all elements of society.

Through the coronavirus crisis, businesses that have struggled the most have been those which have been overly reliant on a particular geographical area or single supplier; those which don't have sufficient visibility across the supply chain to allow them to properly identify risks; those which don't have sufficient processes in place to understand stock levels and potential stock-shortage risks.  Similarly, those with rigid logistics networks have experienced challenges in seeking to implement flexibility at short notice.

Those businesses which have tended to manage the coronavirus crisis effectively have tended to be those which have a developed supply chain risk management and business continuity strategy and have diversified supply chains.  Importantly, those which have strong relationships with key suppliers have been able to respond and adapt to the crisis at greater pace.  Those strong relationships have enabled them to maintain open communication channels so as to better understand (and predict) risks and put in place action plans based on their priorities.

So, if a key feature for a resilient recovery is relationships through the supply chain, here's some 'food for thought':

  1. How well do you know your suppliers?
  2. Do your suppliers trust you?
  3. Would they talk to you openly if they were experiencing difficulties?
  4. Would your suppliers feel comfortable suggesting adaptations to production or the supply chain or asking for help?
  5. Would you work together with your suppliers to help them overcome difficulties?

Collaborative contracting isn't about accepting lower service standards or not calling a supplier to account, but it is about a shift towards a more supportive mind-set to build a recovery in which all participants in the supply chain can thrive.

#2 Coronavirus: Funding the supply chain, an opportunity for a collaborative approach?

The intimate connection between trade and the financing of trade has been brought into sharp focus during the coronavirus crisis. 'Cash is king' has become a well-used mantra with all elements of the supply chain looking to preserve cash. SME's are a key element of the global economy though sadly, it is widely recognised that these businesses are likely to have been the most severely impacted by coronavirus.

Equally, many businesses in the supply chain are working out how to keep a close eye on the financial viability of their suppliers. Businesses are concerned to ensure that the financial difficulties of suppliers don't put in jeopardy the supply of key material and parts. Urgent support has been put in place around the world with governments, banks and other lenders keen to offer support to otherwise viable businesses. In the UK,  the Corporate Insolvency and Governance Bill, which is due to become law in the next few weeks, will also impact upon the remedies available if a supply chain partner becomes subject to a formal insolvency process.

What does this mean for the supply chain and how might it respond?

  1. In the immediate term, suppliers may require full or part payments in advance or payments on account.
  2. Similarly, in the immediate term, suppliers may seek to negotiate shorter payment terms.
  3. It's anticipated that we may well see a rise in receivables financing. Buyers may look to put in place buyer-led receivables financing for their suppliers to participate in. If the buyer has an acceptable credit rating, banks are likely to be pricing credit risk in a way that is consistent with the credit rating of the buyer. This should result in more attractive rates being available than might otherwise be the case for supplier-led receivables financing arrangements.

In any event, a successful recovery from the coronavirus black swan event surely requires all elements of the supply chain to collaborate together to ensure that they can together recover and thrive.

#1 Coronavirus: an opportunity to build a resilient supply chain?

The coronavirus black swan event has brought into sharp focus the complex, global nature of the supply chains upon which very many businesses depend. As the pandemic spread from east to west, no element of the global supply chain was immune from disruption. With raw materials, parts production and transportation subject to lockdown restrictions, the pandemic has proved to be a fast-track master class in supply chain crisis management. Equally, it’s widely recognised that supply chain resilience and agility will play a central role in the recovery of businesses from the impact of coronavirus.

So, if coronavirus has been a fast-track master class in supply chain crisis management, businesses should ensure that they take the opportunity to reflect on what they’ve learnt and how these lessons can be taken forward to develop a supply chain with greater resilience and agility. After all, this won’t be the last supply chain crisis and other "world events" may prove disruptive, for example, the US-China trade war and the "no deal" risk at the end of the Brexit transition period.

Key lessons:

  1. Having a detailed understanding of your supply chain for key materials and parts is crucial. This understanding should extend beyond your tier 1 suppliers.
  2. Ensure you have a good understanding of your logistics and distribution networks. Are they sufficiently agile?
  3. Assess the level of dependence on key suppliers. What is the geographical spread of your supply chain?  Do you need to diversify your supply base?
  4. Consider the nature of your relationship with key suppliers. Is the relationship sufficiently collaborative to foster transparency and problem solving?


Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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