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4. September 2020Supply chains came under significant pressure at the beginning of the Corona crisis. Beat K. Schlumpf and Ass. iur. Thorsten Vogl conducted a survey to understand the problems faced by those affected. Conclusion: Most companies managed to get through the crisis well, albeit with more effort and higher financial costs.
By Beat K. Schlumpf and Thorsten Vogl
(Zurich) To understand the problems of companies and to provide more targeted advice, Beat K. Schlumpf and Ass. iur. Thorsten Vogl conducted a survey on issues arising from the Corona crisis within the framework of the Supply Chain. The responses provided some interesting insights.
Transparency of Supply Chains
Initially, the majority – 60% – indicated that they do not know their supply chain in detail and do not conduct supply chain monitoring. This is, of course, fatal as it complicates rapid responses to disruptions that occur at the unknown links. Moreover, more and more states are regulating the responsibility for human rights violations in all preceding links of the supply chain – ignorance does not protect against punishment (see our newsletter from January 2019 for more details: Forced Labor and Human Trafficking).
It is therefore important to know all links in the supply chain and to conduct regular monitoring – today more than ever! GSL Consulting GmbH advises on effective monitoring methods.
Supplier Issues During the Pandemic
Only 20% of the surveyed companies reported that suppliers completely ceased their business activities during the Corona crisis. Nevertheless, 60% experienced difficulties in obtaining their ordered items (goods, spare parts, raw materials, or components for production). Thus, there were often difficulties with unknown and more distant suppliers in the supply chain, or the virus-related transport issues had an impact.
The responses clearly show that long and not well-known supply chains are vulnerable in a crisis situation and can lead to problems even when immediate business partners continue their operations. 60% struggled with the issue for an extended period, while 20% were affected only once and 20% experienced recurring disruptions.
In most cases, the supply chain, especially when it is long and opaque, proves to be sensitive: disruptions often persist and can lead to greater problems for the end customer. 40% of businesses had to completely shut down a part of their operations, 40% had to reduce production, and only 20% could continue operations unchanged.
Fortunately, no participating company was required to shut down its entire operation. 60% of survey participants were able to quickly find a solution to the problem and source the necessary goods elsewhere – however, this often leads to frantic activities that place a heavy burden on staff and management, and in many cases, the short-term replacement procurement results in significantly higher prices.
Legal Aspects
Since our legal system generally requires the fulfillment of contracts as long as this is possible, and the loss of the calculation basis remains irrelevant except in extreme exceptional cases (Customer Service in Corona Times – Legal Aspects), this can lead to companies being forced to make expensive replacement procurements to fulfill contracts that become uneconomical for them. In crisis times, this is often the first nail in the coffin!
A crisis-proof supply chain often prevents bankruptcies! However, the majority of respondents were fortunate to get through the crisis without additional costs. Only 1/5 experienced a general increase in the price of ordered goods, and 1/5 of participants experienced partial increases.
Communication with Suppliers
Also positive: communication with business partners worked in most cases. The obligation to immediately inform the business partner of any difficulties is a contractual ancillary duty that is often overlooked and can trigger claims for damages for the affected party. Since this point is sometimes given too little attention in practice, many companies fail to actually assert these claims for damages.
This also applies to cases (in the survey, at least 20% of the participating companies) where the information is inaccurate or comes too late. It is surprising that 60% of the surveyed companies state that they do not know their rights and obligations in such an exceptional situation. This can be costly if one either has to pay unnecessary damages or fails to assert such claims because one does not think of it. Especially when a company is financially “on the brink,” a high damages payment can mean the final nail in the coffin, or on the other hand, the successful assertion of a claim can be the salvation. GSL Consulting GmbH can assess whether a situation entitles you to claims for damages.
Not infrequently, contact with business partners was also made more difficult, in some cases (in 20% of cases) even significantly. Such communication failures must not occur, as the infrastructure (internet, fax, telephone) was functioning. In such cases, one can rightly examine claims against the business partner. However, the majority of business partners made efforts to resolve emerging problems.
Insurance Coverage
Too little attention is paid to insurance coverage: 60% of the surveyed companies were not insured against the risks, although insurance solutions must be critically examined at the time of contract conclusion. Many business closure insurances do not want to compensate for losses due to Corona, whether because the new virus is not listed in the insurance conditions, state aid is offset, no total closure occurred, or the general preventive closure is not recognized, but only closures due to specific cases of illness in the company.
Numerous lawsuits are currently pending from the hospitality sector due to such reasons. It may be worthwhile to bring such disputes to court to avoid risking the expiration of existing claims. However, this question must be examined on a case-by-case basis and with regard to the specific contract.
So far, only 40% of respondents have experienced changes in the supply chain; however, such changes are planned by the majority of companies to avoid dependence on one or a few suppliers.
Conclusion
The majority of companies have largely weathered the first months with additional effort and money. Legal aspects, insurance coverage, etc., were pushed aside due to urgency. However, most companies are still far from professional crisis management. The experiences from the swine flu in 2009 have hardly been implemented to make the supply chain more robust and agile. Also read our article Coronavirus in the Supply Chain – After the Crisis is Before the Crisis.
The topic should regularly be on the agenda of the board of directors and management and is part of corporate governance and due diligence. Given the ongoing and unclear crisis situation, the board of directors is well advised, due to its supervisory duty, to get a clear picture of the risk management of the management. This includes adjusting the reporting obligations to the current circumstances in terms of timing and content, as well as having plans for possible scenarios and a risk assessment presented.
Dealing with Risks According to the Swiss Code of Best Practice for Corporate Governance
The board of directors ensures an internal control system and risk management tailored to the company.
The Authors
Beat K. Schlumpf FCILT
Over 40 years of experience in logistics and supply chain execution in various management functions at home and abroad. Methodology with the Operations Efficiency Assessment and the Time Factors Model for process evaluations. One of the few experts in transport and distribution logistics worldwide, who knows all modes of transport (rail, road, sea, air) and speeds (heavy transport, general cargo, full loads, parcel, express, letter, courier) from operational experience. https://www.gsl-group.ch/de
Thorsten Vogl. Ass.iur – Associate
Member of the board of the Permanent Swiss Arbitration Organization (SGO) Zurich. Honorary member of the Association pour l’unification du droit en Afrique (UNIDA), Paris. Editor of the Journal of Road Traffic/Circulation routière. Specializing in transport law and supply chain law.
