Tis the season… to be prepared for supply chain risks

By Chris Sacré and Nicole Tumiati 

In the next instalment of our series examining the top legal issues the fashion and beauty sectors need to consider during the festive holiday period, we look at how continuing supply chain vulnerabilities may impact the industry.

After suffering disrupted trading for three consecutive years due to the bushfires in 2019 and COVID-19 restrictions in 2020 and 2021, retailers have been forced to prepare for the unexpected.

Many retailers have been rocked by unforeseen supply chain vulnerabilities and bottlenecks, leading to delays in product delivery and ultimately a loss in revenue. One of these unpredictable disruptions has been due to extreme weather conditions which can severely impact several modes of transport. (Tune in to our ‘Extreme weather’ podcast to find out more).

Across Europe last year, retailers such as H&M couldn’t meet demand because of delivery delays. In the US Nike cut its sales forecast after COVID-19 triggered factory closures in Vietnam that wiped out months of production.

At the heart of these crises is a common theme: the lack of robust processes to identify and successfully manage growing supply chain risks.

So, what are these supply chain risks and how can you prepare for them during (and after) the festive season?

What are supply chain risks?

Most retailers rely on complex supply chains. The end products produced are usually made up of multiple components sourced domestically and overseas. In Australia, approximately $1.7 billion of consumer goods are imported and exported annually. Most of those products arrive through our ports. Transportation by ship of course has its own risks.

For example, what happens when containers, or the goods contained within them, are not secured properly and a ship is faced with severe weather conditions? If stowage and packaging fails, the shipment is often a constructive total loss and does not reach the shelf.

Accordingly, it is important to identify and prepare for any supply chain risks that may impact your business. Here is a list of a few risks that your suppliers may face in preparing to deliver your product:

• Demand risks caused by an increase in customer demand.
• Supply risks due to any interruptions to the flow of product, whether raw material or parts.
• Business risks caused by factors such as a supplier’s financial or management stability.
• Environmental risks that are usually related to economic, social, governmental, and climate factors. This might include floods, bushfires, cyclones – the list continues.
• Physical plant risks caused by the condition of a supplier’s physical facility and regulatory compliance.
• New risks such as cyber ransom attacks, which can force a business to shut down operations while dealing with the attack.

Each of these supply chain risks can have significant effects on your business. The implications might include reduced revenue, decreased market share if your customers are forced to shop somewhere else, inflated costs involved with switching to another supplier at short notice and reputational damage that may result in bad reviews being left by your customers.

How can you mitigate these risks?

While a supply chain incident may well be out of your control, something that is within your control is the ability to mitigate your risk with insurance and certain clauses in your supplier contracts.

Your cargo insurance may cover loss or damage to cargo but is unlikely to cover losses caused by delay or loss of market.

Business interruption insurance may cover the loss of any sales you would have made without the supply chain incident. It may also cover any extra costs that you incur to stay open, including ongoing operating expenses such as electricity and rent, relocation costs, and damage to a supplier’s premises. You should check the terms of your policy to confirm you are covered for these risks throughout the festive period.

Product liability insurance may also be necessary if a particular product, or component within your supply chain is impacted. It may cover the cost of investigating and defending your business against a product-related claim. It may also cover the cost of any damages awarded to a customer if your business is found to be at fault.

As well as obtaining the right insurance, your supplier contracts should include clauses that protect you in the event of both a foreseen supply chain risk and an unforeseen supply chain risk.

Allocation of risk for loss or damage of goods will be material to any supplier contracts. It should be made clear in the supplier contract whether the arrangements are on an exclusive basis; the greater reliance on a single supplier, the greater the risk.

A supplier bankruptcy may be a foreseen supply chain risk, as it is an event that can be reasonably anticipated. A supply agreement should have a clause that protects your rights if a supplier goes bankrupt. Any clause would usually trigger an immediate termination of the agreement and set out your rights to any of your products that the supplier may hold in its possession.

An example of an unknown risk is something that is difficult to foresee, much like a pandemic! This may include effects on operations that you did not know were in your supply chain (such as a third party working with your supplier). It could also include exploitation of a cyber security vulnerability buried deep in the firmware of a critical electronic component of one of your suppliers.

For unknown risks, reducing their probability and increasing the speed of response when they do occur is critical to minimising the impact on your business. You may consider including a way to deal with these delays in your supply agreement, or in any operational instructions provided to your supplier.

It is always encouraged that you do your due diligence on your suppliers to ensure there are appropriate emergency procedures in place should one of these supply chain events occur.

The Queensland Government has released a helpful guide on how to prepare a plan of action with a focus on your bottom line, ‘Managing risk in supply chains‘. 

Remind your customers about Australia Post delivery dates

It is also important to be open and transparent about any delays in your delivery times with your customers. If you do not believe orders will be received by Christmas, you should include this information on your website.

Australia Post has released its cut-off dates for sending domestic mail to ensure their purchases arrive before Christmas.

The postal service is encouraging people to get cracking on Christmas shopping, announcing parcels to and from most destinations in Australia should be sent by December 12 and December 19 for express post. See ‘Christmas sending dates’ on the Australia Post website.

It is really important to have a plan in place to deal with these risks if they occur. If it is not something that you are able to attend to over the festive period, it is something you should review in the new year. It may be a good new year’s resolution!

If you have any questions or concerns about your supply chain risks, please contact our team of experts.