Working on the Chain: Lessons from the COVID-19 Era
COVID-19 has created numerous supply chain issues, which continue to be top of mind for leaders across many industries as companies navigate new and evolving business norms. Supply chain relationships and processes need to be re-imagined, formed, monitored, and executed with appropriate diligence to protect your company from threats both legal and reputational, particularly in light of an increased focus on ESG.
Important supply chain considerations include:
The flow of goods – either fully manufactured goods for distribution and sale into the Canadian markets or their inputs that are imported into Canada for further manufacture. To manage this challenge, particular attention must be paid to:
- Controlling delays at the border with risk-based strategies and taking stock of domestic and foreign inventory supplies;
- Finding contractual opportunities to exit non-essential product sourcing, and / or finding alternative sources of supply to supplement procurement where manufacturers are operating at a reduced pace, or entirely shut down;
- Securing relationships in the U.S. and other jurisdictions that may have not been at the forefront previously;
- Taking advantage of duty remission and / or deferral opportunities at the border to save on immediate costs on imported products; and
- Understanding the danger in relying on only one source of supply when engaged in goods distribution in Canada. Trade diversification is going to become an essential element of procurement strategies moving forward.
On the labour and employment side, with government restrictions easing and employers returning their focus back to a possible return to office in the coming months, there needs to be a continued focus on occupational health and safety and ensuring that all necessary steps are taken to prevent the risk of outbreak within the workplace, which not only puts the health and wellbeing of the workforce, their families, business partners and the community at risk, but also creates a key supply chain jeopardy of a facility or shift shut-down/closure order under applicable public health authority. While every workplace requires a tailored approach, important considerations include:
- Whether and how to encourage, incentivize and/or require that employees be vaccinated, while managing for human rights accommodation considerations, vaccine misinformation and hesitancy, and privacy considerations;
- Restricting who can enter and exit the workplace and how such entry will be permitted (e.g. screening, rapid antigen testing, etc.);
- Workplace reconfiguration, sanitization and workforce redesign (e.g. staggering of shifts, PPE usage, etc.);
- Working with supply chain partners and understanding their COVID-19-related protocols to ensure consistency of approach; and
- Continued monitoring of public health and government recommendations and requirements to ensure compliance and best practices.
Paying particular attention to a strong contract management system, so that, for example, clients know their material contracts, supply chain contracts, contracts at risk of termination etc. Other ways of managing risk include:
- Formalizing any extant informal interim arrangements or workarounds and/or rectifying any deviations from practice that the parties do not want to persist post-disruption;
- Careful drafting and timely enforcement of force majeure clauses, material adverse effect clauses, termination clauses, and/or dispute resolution clauses;
- Documenting mitigation and compliance during supply chain disruptions, which is often a precondition to relying on a force majeure clause;
- Improving record keeping practices to document interactions with counterparties while working through supply disruptions;
- Data protection clauses in contracts and other cyber security strategies in light of the increase in online resource sharing due to COVID-19;
- Carefully review contracts to see what provisions may assist (e.g. a termination provision that allows a supplier to get an early warning or terminate prior to an insolvency filing);
- Understand the implications of an event of default, including whether certain rights are accelerated or deferred;
- Consider whether the agreement has been “frustrated” or rendered impossible to perform and potential remedies;
- Assess availability of insurance coverage to respond to your circumstances of loss; And
- Have regard to the duty of good faith in contractual performance when communicating with counterparties and managing disruptions (see Bhasin, Callow, Wastech).
Just as individuals have been reaching out to their personal networks for support in these uncertain times, companies may be inclined to do the same. However, competitor collaborations in respect of certain activities, such as agreements on the price of products or services, production levels and allocation of customers or markets can raise serious antitrust risk, including potential criminal liability. Moreover, pandemic has exposed some of Canada’s supply chain vulnerabilities and highlighted the potential impact on public health and welfare that a high degree of foreign reliance may have.
- The Competition Bureau indicated it may exercise its enforcement discretion in certain circumstances in light of COVID-19 in recognition of the fact that certain competitor collaborations – in limited industries and circumstances - may be necessary to ensure continued supply of “critical“ goods and services.
- Conversely, foreign investment scrutiny has increased dramatically in respect of potentially sensitive industries. Enhanced scrutiny has been applied to any investments in Canadian businesses related to public health or the supply of critical goods and services to Canadians or to the Canadian government, as well as those involving sensitive personal data.
- Companies need to continue to be mindful of antitrust and foreign investment laws to ensure they are not inadvertently creating a cure that may be worse than the disease.
Supply chain challenges are diverse. Business leaders have to take a comprehensive approach to stabilizing their supply chains for long-term success, beyond the impacts of COVID-19. Here are some steps you can take now to stabilize your organization’s supply chains for the long run:
- Review and assess related policies, processes, and controls as against international standards;
- Identify areas of legal and business risk; and
- Develop and implement solutions (such as process or policy enhancements) to mitigate those risks.
If supply chains are critical to your organization’s success, we can help. We have developed a market-tested Supply Chain Stabilization Solution which has helped a number of clients rapidly review their supply chain contracts using AI technology and implement and test solutions that both reduce and protect them from risk. Please don’t hesitate to give us a call to discuss your specific concerns.