Supply chains are facing a period of significant economic stress. Businesses are continuing to recover from the COVID-19 pandemic, and recent events including the conflict in Ukraine and shortages of vital raw materials have adversely affected a wide range of entities in supply chains across the globe. 

In this article, we consider the importance of contingency planning and managing risks in supply chains, and the practical steps businesses can take now to protect against the increasing risks of supply chain vulnerabilities. 

Review your supply chain 

As a first step, it is vital to identify your business's critical suppliers. 

In the case of particularly complex supply chains, consider deploying management software to fully map out the supply chain. Such solutions can also assist in assigning risk scores to suppliers and in tracking in real time the risks and consequences of failures in the supply chain. 

In the context of the initial review, we would recommend requesting access to current financial information and forecasts, as well as setting up news alerts on each supplier. 

Once that review is complete, it is essential to consider whether the goods and services upon which your business relies can be sourced from alternative suppliers. 

Consider your alternatives 

If this initial review identifies any significant points of risk or weakness in your supply, we can advise on termination rights and legal issues which may arise on termination, including title to goods and damages in the event of early termination. In order to ensure that you are fully informed of the risks of supplier insolvencies, we can also identify and advise on the scope of step-in rights. 

More generally, businesses may wish to consider making contingency plans to manage the risks of replacing the supplier in the event that they suffer an insolvency event or are otherwise unable to fulfil requirements. 

Investigations into alternative suppliers may include preparation of a provisional shortlist with likely lead-in times, key contacts, an impression of financial stability and feedback from stakeholders as to previous experiences with the suppliers under consideration. 

The main legal issues to consider in this scenario include: 

• whether switching suppliers risks infringing any IP rights. For example, we can assess the position with respect to the use of products and equipment branded with a supplier's intellectual property following termination; and  
• how to establish ownership of key intellectual property, know-how and equipment. For example, this can often be anticipated and dealt with in the context of contractual negotiations at the point of renewal of a supply contract. 

If you are considering terminating supply contracts, it is essential to obtain advice on the legal and commercial risks of doing so, as getting it wrong can leave you on the hook for a significant damages claim. You may alternatively wish to seek assistance in renegotiating supplier contracts to mitigate the risks outlined above. 

You should also ensure that adequate insurance is in place in the event of supplier insolvencies. 

Work with business-critical suppliers

Terminating or raising disputes over a contract should always be considered options of last resort. Businesses concerned about the risks to which a critical supplier is exposed may first wish to consider how they might be able to help their business partner trade through temporary difficulties. This could include: 

• revising credit terms to improve their cash flow (ensuring that if you make payment before delivery, you acquire title to goods before doing so); and 
• supporting the supplier's financial management. For example, this can include developing a rescue plan for deployment in the event of severe adverse circumstances, or supporting an application for business support grants.

If such support is extended to the supplier, it is advisable to ensure that the supplier provides detailed real-time financial information and forecasts. We can also advise on putting in place confidentiality agreements, should you wish to work more closely with suppliers to address supply chain risks and financial concerns.