Companies are coming to grips with the fact that supply chain disruptions have become and may remain a consistent feature of doing business in the manufacturing and distribution sectors. Whereas risk mitigation strategies are often tightly tied to insurance and liability policies, managing supply chain risk must be a key organizational function requiring personnel, policies and preparation. Read more.

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I
n 1990, the U.S. made 37% of the world’s chips and
microelectronics. That number today is just 12%,
according to an industry report. The U.S. reliance
on outsourcing chip-making to foreign manufacturers
made sense when distribution was no problem since
it’s cheaper and there is less regulation outside of the
U.S. But supply chain challenges and shifting consumer
demands for products like cars and electronics during
COVID-19 contributed to the current chip deficit. The
National Association of Manufacturing’s Director of
Innovation Policy, Stephanie Hall, explained recently
that the shortage is reverberating throughout the
manufacturing supply chain, causing problems for
manufacturers in all sectors. (See Manufacturers Take on
Semiconductor Shortage.)
Those shortages are shining light on the risks of
depending on foreign chipmakers. Recognizing the
economic and national security benefits of ramping up
U.S. chip production, U.S. Commerce Secretary Gina
Raimondo recently announced federal incentives to
boost domestic chip production that could result in seven
to ten new U.S. semiconductor factories, according to
Reuters. The construction would be supported by $52
billion in new federal funding for semiconductor R&D and
production, part of bipartisan legislation working its way
through Congress.
But microelectronics and chips aren’t the only shortages
resulting from supply chain disruptions – lumber, metals,
steel, resins, chlorine, and gasoline are prime examples.
In the last year, production and shipping have been
impacted by natural disasters (earthquake, storms,
drought and fire). Global competition for materials
has been heightened well beyond the norm. Logistical
issues (e.g., shortage of shipping containers, blockage
of the Suez Canal) have contributed to delays in delivery
of essential materials, parts and products that have
impacted production. Manufacturers are having difficulty
keeping up with demand.
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The warning bells are ringing loud and clear. The sector
as a whole must reexamine supply chain strategies,
contingency planning, risk management and mitigation.
Gaining visibility into suppliers’ and sub-suppliers’
production, leveraging technology for B2B integration
(connected platforms) and data sharing can serve as
early warning systems going forward.
What are immediate risks and mitigation strategies?
Analyze and prepare for contract risk. Manufacturers
and distributors unable to meet contract delivery dates or
volume commitments are in the crosshairs of risk. Taking
a fresh look at commercial contracts is a first step toward
recognizing and mitigating vulnerabilities. Analyze your
contracts, with support from your risk manager and legal
counsel, with an eye toward provisions that can impact
your rights in the event of an unexpected occurrence or
shortage. Specifically --
■ Consider how to allocate risk under the contract
■ Consider risk assessment for existing long term
agreements (LTAs) and strategic suppliers
■ Involve supplier/contract managers in all aspects
■ Consider past issues, disputes or breaches
■ Carefully consider “red flags” – delivery, warranty,
indemnity, limitation of liability and force majeure
language
Force majeure. The term force majeure is French for
“superior force.” Force majeure clauses are common
business-related contractual provisions. They provide
for a suspension or cancellation of a company’s
performance of obligations under the contract should
an extraordinary event occur that is beyond the control
of either party. Force majeure generally describes such
uncontrollable events that are not the fault of either party
and that make it extremely difficult, or impossible, to
carry out normal business (e.g., war or extreme weather).
Prior to entering into a contract, it’s critical to ensure the
triggers for force majeure are not too restrictive, and that
you have an understanding of what would and would not
trigger force majeure.
Time-critical and other sensitive contracts are often
drafted to limit the shield of the force majeure clause
where a party does not take reasonable steps (or
specific precautions) to prevent or limit the effects of the
outside interference, either when they become likely or
when they actually occur. Contract nonperformance as
a result of a cyberattack may be a prime case in point.
Would a customer regard such an attack as a major
event absolving the supplier from delivery of an order, or
would this be an event that could have been reasonably
prevented or otherwise mitigated by appropriate systems
and controls?
Invest in cyber risk assessment and management.
The expanded remote work environments and increased
dependence on technology have heightened the risk of
cyberattacks and hacking. In a recent letter addressed
to corporate executives and business leaders, the White
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3. (Continued from page 2) Be prepared for litigation. Implementing a program
of “dispute readiness” will support your efforts to
defray culpability and liability and may strengthen your
contractual processes during non-eventual times.
■ Train your employees for the event that litigation
becomes inevitable
■ Know what documents constitute your contract
■ Know whether your contract contains notice
provisions, arbitration clauses, forum selection
clauses, and/or venue clauses
■ Understand the concept of “building a record” with
respect to the ongoing supply chain dispute
■ Identify key members of the business team with
information regarding a dispute and prepare a
chronology of events
■ Do not put anything in an email (or text or chat) that
you would not want to be read aloud in court
■ When working with an attorney, understand
when attorney-client privilege does not attach to
communications and documents.
■ Track all damages and costs related to supply
chain issues.
Bottom Line
Supply chain disruptions are no longer an unexpected
event. Companies are coming to grips with the fact that
these disruptions have become and may remain
a consistent feature of doing business in the
manufacturing and distribution sectors. The risk of
supply chain disruption or delay must be considered and
incorporated into procurement, production, logistics and
contract fulfillment planning.
Properly aligning staff and deploying technology to the
supply chain function can be key. Putting contracts under
the supply chain function, engaging in collaborative
strategic sourcing and establishing alliances with key
suppliers all contribute to ensuring preparedness for
unexpected events.
Supply chain disruption is a risk in modern manufacturing.
Whereas risk mitigation strategies are often tightly tied
to insurance and liability policies, managing risk is a key
organizational function requiring personnel, policies and
preparation. Working closely with sales and procurement
to ensure active supplier management and diversification
of supply is now the gold standard. Training key employees
on best practices for procurement, contracting and
preparing for litigation will put you in the best position to
be successful in any future dispute.
House emphasized that bolstering the nation’s resilience
against cyberattacks is a main priority for President Joe
Biden’s administration and is urging businesses to take
the evolving ransomware cyber threat seriously.
These attacks—which entail a cybercriminal deploying
malicious software to compromise a business’s network
or sensitive data and demand a large payment be made
before restoring this technology or information—have
quickly become a growing concern across industry lines.
In fact, the latest research provides that ransomware
attacks have increased by nearly 150% in the past year
alone, with the median ransom payment demand totaling
$178,000 and the average overall loss from such an
attack exceeding $1 million.
Invest in cyber assessment and cybersecurity measures.
Utilize the federal government’s best practices outlined in
the Biden administration’s Executive Order on Improving
the Nation’s Cybersecurity. Implement multifactor
authentication on all workplace technology and provide
employee training to spot phishing, scams and hacking.
Coordinate your efforts with your broker to incorporate
cyber liability insurance in your insurance program.
Establish lines of communication. Regardless of whether
a contract includes a force majeure clause, companies
might find success in managing unforeseen events by
simply contacting suppliers to directly to explain and
discuss delays or other issues. You may determine
that you can alter your agreement to allow for future
performance by agreeing on modified terms. A clear
line of communication can ensure everyone is on the
same page, and the individuals and companies involved
typically appreciate a proactive approach during a
particularly tumultuous period.
Be prepared for disruption. While business disruption
may be unavoidable, having a plan in place will help your
organization manage any ensuing chaos and minimize
contract nonperformance. A strong, functional disaster
and continuity approach not only helps your company
survive the next unexpected event, but it could also
help you make up ground on your competition during
extraordinary times. There are five key areas to consider
when preparing for the next major disruption. These
include quantifying the risk of a business disruption,
planning for impact to physical structures and operations,
preparing for the financial impact, prioritizing insurance
coverage, and having the technology to respond quickly.
(See Safeguarding Against the Unexpected.)
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This article was compiled by the CBIZ editorial staff drawing on news reports and a National Association of Manufacturers webinar
presented by Foley & Lardner LLP, attorneys at law.