In our prior posting, we shared Part One of a Ferrari Research Group Advisory. Our commentary addresses why the groundswell of increased concerns being placed on continuous supply chain disruption, along with global and domestic transportation cost inflation will likely be the accelerant for the rethinking and realignment of industry supply chain sourcing strategies over the next 2-3 years.

In this Supply Chain Matters posting, we share with readers what has been the response from some business procurement teams in addressing the ongoing challenge.

 

Earlier this week, The Wall Street Journal published a report, Supplier Contracts Get Revamped After COVID-19 Disruptions. (Paid subscription or metered view) The essence of this report is that manufacturing and retail procurement teams are seeking to change some of the contract terms related to supplier agreements now that added risks and costs have become far more present during the past two years.

The report cites views from various attorneys practicing contract law who are advising businesses to better define which parties more clearly should bear the risks that cover the impacts of pandemics and accelerating inflation.

If any of our readers have taken either the ASCM certification exam for Certified Supply Chain Professional (CSCP®) or the ISM CPSM® procurement certification exam, may have encountered a question as to what the term Incoterms represents. This term is the abbreviation for the International Chamber of Commerce commercial terms related to global commerce. The WSJ report indicates that international supply contracts or Incoterms generally carry broad delivery and cost terms, and many include standard boilerplate language.

The ongoing disruption and cost inflation that now permeates global supply chain supply agreements have now reportedly “overwhelmed the guideposts in many contracts.” As an example, force majeure contract language allows suppliers or services providers such as carriers to be excused from stated terms when extraordinary events beyond control occur. As procurement teams are now well aware, force majeure declarations have been frequented during COVID and now post-COVID impacts. As the report notes, no longer can it be cut and paste contract language. In a similar vein, more rapid cost inflation has hindered many suppliers or services providers to be able to deliver at the contracted price without consideration of a price increase related to that contract agreement. In the specific area of transportation and labor services, carriers and services providers attempt to circumvent stated contract terms with added surcharge costs related to unforeseen circumstances such as labor costs or the increased cost of fuel.

What caught this Editor’s attention was a cited quote from a law partner who has many years of experience in supply chain disputes: “In my entire lifetime, we’ve been out of practice for using inflation clauses and now we’re getting back to it.”

Indeed, that is the takeaway message of what supply chain management teams are dealing with today. This is a point in many careers past processes, practices and risk factors related to supply network sourcing and contracting have uncovered unforeseen challenges.

Perhaps teams have gotten to depend on the prior reliability of just-in-time inventory management and global supply chain movement practices, or in the ability of adequate buffer safety stocks to be able to overcome a supply shortage. The same for supply sourcing and contracting that had been determined by lowest cost criteria, without having the ability to assess and quantify all of the associated added risk factors.

At the risk of harping on common cited analogy:

A rising tide raises all boats; a lowered tide exposes all rocks.

Welcome to the new normal.

 

Bob Ferrari

 

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