Covid-19, Force Majeure and Impact to Global Supply Chains

On a previous supply chain minute I focused on a topic I’ve discussed on the show before which is force majeure as a direct impact of Covid-19. This is something I highlighted earlier in February on the show, as I believe it will have long lasting effects across industries so let’s dive deeper into what it means and what’s happening globally with force majeure declarations.

Force majeure- what is this? The general contracting language for this clause reads something like this: Neither party shall be liable to the other for failure or delay in the performance of its obligations under this Contract to the extent that this is caused by matters beyond the reasonable control of the party affected, which in short means if either party cannot meet their contractual responsibilities due to extenuating circumstances force majeure can be declared without any penalties.

Force majeure is a clause that generally protects the organizations in case they cannot conduct business according to the pre-agreed terms due to an unforeseen event out of their control. What this means for individuals is that if we purchased a service, such as an airline tickets or hotel stay, and due to any situation covered by force majeure the business could not provide the service, consumers cannot hold the business legally responsible if this is invoked. In this situation, consumers may have other options like taking a credit for later use, and hope this is an isolated, one-time event. For international businesses, however, the situation is different.

force picThis brings to mind an earlier instance when force majeure declarations were widespread, during the 2014-2015 International Longshore and Warehouse Union (ILWU) strikes affecting 29 US ports and impacting global trade. The negotiations between ILWU and the Pacific Maritime Association lasted many months leading to port closures, chassis shortages, container ships stranded at distant anchorages, and racking up tens of thousands of dollars a day in contractual demurrage and detention charges. After months of turmoil global organizations impacted resorted to invoking the force majeure clauses within their contracts.

At the time I was working with a global manufacturer and distributor of home textiles with printed licensed graphics such as NBA, NFL, NHL and Disney. Some may recall, the port strike did not conclude until after the holiday retail season in the spring of 2015, and once things got “back to normal” our company was stuck with hundreds of containers full of holiday merchandise, as many other retail distributors. In our case the product was Frozen themed home textiles stuck in shipping containers at ports across the West Coast. This inventory was slated for holiday sets in large retail stores, but given the port delays the good were released months later. Raw material suppliers, manufacturers, carriers, and freight partners had declared force majeure so there was nowhere to turn as holding costs for obsolete inventory continued to grow. During that time the situation was somewhat isolated, now we are looking at a far greater number of organizations who may resort to force majeure declarations.

When organizations declare force majeure, ripples are felt throughout the entire supply chain. The current pandemic has pushed global organizations to invoke force majeure clauses- let’s see what’s impacting global supply chains?

  1. DHL Global Forwarding– has declared force majeure first for it’s Europe- Asia trade routes, however later in March this was extended globally. With this declaration DHL has reserved the right to make changes to all or a part of its air and ocean services.
  2. Ceva Logistics has put forth a declaration stating that under current circumstances any previously agreed rates and charges can change, and additional surcharges can be applied through invoking their force majeure clause.
  3. Royal Enfield one of the oldest motorcycle manufacturers globally has been impacted, announcing that their force majeure clause may extend beyond the 21 day lockdown that India has declared.
  4. The Chinese government issues force majeure certificates to over 1,600 organizations with specific focus in the gas and oil, textile, mining and machinery industries. Below is a breakdown of the allocated certificates by sector.

China

  1. India has become the center for force majeure declarations after the country announced a 14 day quarantine on all goods coming from China or any other impacted nation; these delays are specifically impacting the energy sector and the country’s imports of liquid natural gas.
  2. Sports- will a force majeure clause determine if the NBA is required to pay the players for a season that has not been played and the current decision to postpone.
  3. Global trends show force majeure are more prevalent in emerging markets and with significant impact to the energy sector– this can have long lasting effects on local supply chains and bottom of value chain contributors.
  4. The mining sector has seen a high number of organizations declare force majeure impacting mining operations as well as suppliers who are unable to make deliveries of product already ordered.

 

Some force majeure clauses specifically exclude pandemics and global health crises, others will explicitly include these- when was the last time you checked this contract clause? Will this lead us to think differently when negotiating supplier and vendor contracts in the future?

Webinar: Automated Order Processing For Proactive Inventory Management

Webinar sponsored by Esker on Supply Chain Brief:

Organizations need to focus on demand driven supply planning, utilizing real time information on customer orders from all marketplaces (e-commence, Amazon – or other online retailers, and point of sale data from brick and mortar).

Focusing on this information once per month during the S&OP meeting is too late for all business units to align. Companies should have seamless integration between order entry, inventory management, forecasting and supply planning models and purchase order status to sense risk, pull levers to mitigate potential risk, and communicate within and outside the organization. This is especially important for new product releases, in store programs or promotions (sales, end caps, PDQ. etc) or online promotions (company run or 3rd party). Depending on total supply chain lead time, not having real time visibility and analysis of this information can significantly affect sales and the bottom line.

Automated Order Processing for Proactive Inventory Planning_Irina Rosca

ePlanning: Leverage the Logistics Network for Competitive Advantage in eCommerce

IMG_0704Check out my presentation at the SCOPE Supply Chain Summit: SCOPE Atlanta 2019_ ePlanning Presentation Slides

 

 

 

 

Takeaways:

Key Actions for an Optimal Distribution Network:
1. Design an Agile Network with Optimal Inventory Distribution
2. Create End-to-End Visibility Connectivity
3. Pivot to Demand Driven Forecasting and Planning

Supply Chain Leading Strategic Opportunities for Continuous Growth:
• eCommerce Evolution
• Price Control
• Drop Ship Opportunities- Retail Strategic Partner
• Own the Amazon Marketplace- Seller Fulfilled Prime
• International Growth
• Forecast & Revenue Security
• Robust Reverse Logistics
• Best Customer Service
• Offer Innovative Solutions

 

When a customer has opted into the brand, there’s no mystery
about what they want- retention is key!

 

SOLAS

Maritime safety for workers and marine life is important. Businesses have a large footprint on the environment and ocean transportation still lies at the heart of global organizations.

New regulations on weight declaration is meant to create more transparency in the transportation and logistics industry.

How will this change the current structure of the logistics market? We have seen major consolidation and M&A in the market in the past three years, more regulation will help weed out the remaining week links and leave maybe five major shipping lines ruling the oceans.

How will SOLAS affect wholesale businesses, small and large distributors, and will this regulation also create a urgent need for upgrades at manufacturing facilities around the world?

General – SOLAS Container Weight Verification 1604

Coming to a port near you July 1st, 2016. Stay informed!

Supply Chain Dynamics: What if… We Could Think Differently

Screen Shot 2015-11-02 at 12.54.34Supply chain innovation means taking full advantage of best of breed technology and data algorithms that empower intelligent decision-making. The exchange of information, from inside and outside the organization, must be real time, autonomous and continuous.

Previously, I shared an article with insights into the integration of advanced data analytics in supply chain planning. Last week I had the opportunity to participate in a discussion on this topic at the 13th Annual Supply Chain and Logistics Summit. I also attended presentations from Kellogg, Johnson & Johnson and Colgate Palmolive; companies recognized as leaders in supply chain innovation and part of this year’s Gartner Supply Chain Top 25 report. Each speaker mentioned the importance of real time data integration and end-to-end visibility, and gave examples of how this is currently achieved in their respective organizations.

For more than 98% of global companies, implementing a data strategy and using advanced analytics, especially within the supply chain, is a challenge. Not all companies have the talent or financial resources to undertake this type of project. Investments in data structures, analytics and employee training are costly. Knowledge gains from this information are still fragmented between functional silos and across supply chain networks, creating a lack of value and low ROI.

What if we think differently about supply chain data, network collaboration and knowledge sharing.

  1. What if we brought everyone to the planning table?

The Sales and Operations planning process (S&OP) has taken a leading role in supply chain design. S&OP is a great way to connect previously detached processes and prepare a better forecast. This process often falls short because we do invite all departments involved to the planning discussion.

In the consumer-packaged goods industry the cost of logistics accounts on average for 7% of revenues. Logistics partners and internal stakeholders are not part of the S&OP process. This creates a discrepancy in understanding the total cost to serve, and can lead to major challenges in meeting demand and preventing stock-outs at retail stores. Unforeseen trouble in the transportation and logistics network can also hurt brand image. When we involve all actors in the planning process and use data from all nodes within the network we are able to prepare more accurate forecasting models.

Speed and agility are the most important drivers in meeting customer demand. As supply chain executives we must take full advantage of all the knowledge available in the data and capitalize on our partner’s core competencies. This is the model of future intelligent supply chains.

  1. What if we removed longstanding communication barriers?

Functional, siloed organizational structures are standard. A chain of command exists in every organization, each department has specific KPIs, and actors in a supply network have individual vested interests. The ultimate goal is to drive down costs, extend payables periods to release working capital and increase gross margin, all without regard for how this affects the overall system.

This is a direct result of the lack of communication and visibility within organizational departments, and throughout the entire supply chain.

What if we used data knowledge to create an unprecedented alignment of all stakeholders, with common KPIs across the entire network?

If we did this, we could create truly agile supply chains with increased flexibility and visibility. This network could offer better response to omni-channel customer demands. We could lower overall costs and risk by incentivizing shared inventory, shared operations and gain complete chain visibility.

Ultimately, we would create real time automated information sharing networks and continuous supply chain optimization. Participating in such a system creates value for all actors; it promotes proactive policies for risk prevention and creates cognitive systems that learn over time.

  1. What if we built supply chains with end customers in mind?

A recent study from Terra Technology finds that for most companies 10% of items generate 75% of sales, and that the bottom 50% creates a long tail contributing to only 1% of sales. The costs associated with planning, producing, moving, storing, marketing and shelving all of all products affect the overall bottom line.

Only 18% of suppliers receive point of sale data from retail partners. Without SKU level data from downstream partners in the retail sector it is impossible for upstream actors to plan accordingly. Furthermore, the retail sector continues to charge upstream suppliers for these insights. New research from GT Nexus finds that around the world 81% of adults have tried to purchase a product that was out of stock at a brick and mortar store. The study also shows that this leads consumers to become dissatisfied with the brand, 1/3 of shoppers blame the retailer and 65% of them shop for the product online from a competitor.

Unlike excess inventory, we cannot measure the lost sales due to inventory stock outs. We must rethink the design of our supply chains, the sharing of knowledge within organizations and networks to gain visibility and become truly agile. Lack of collaboration is an archaic practice in supply chain management and will serve to further distinguish leaders from laggards.

If we really planned the supply chain with the end customer in mind we could significantly lessen the number of stock outs. E-commerce and click-and-collect models apply new pressures on global supply chains. We can no longer use the same fragmented processes, information and technology to meet demand and enhance customer experience.

Screen Shot 2015-11-02 at 12.58.07

The future of competition is no longer business vs. business, but supply chain vs. supply chain. We must empower our supply chains to sense system changes and adapt accordingly, while increasing collaboration within our global networks.  Our ability to think differently about managing supply chain processes will lead to the development of truly intelligent organizations.

Intelligent Supply Chain Management

This week I will be joining two supply chain veterans at the Supply Chain and Logistics Summit to discuss the influences of technology, software and analytics on supply chain management.

Supply chains are in continual flux. Just when companies think they have developed the best strategies, everything changes. In line with the constant remodeling nature of global supply chains, the discussion is centered around Big Data and best practices leading supply chain executives to think collaboratively within and outside the organization: Supply Chain: of Marketing, Big Data & Digitization.

 Ahead of this discussion I want to share a few insights:

  1. According to a study conducted by Deloitte less than 26% of business executives are using data analytics tools and processes to help manage third party relationship risk. There are numerous data management and analytics platforms available that can empower supply chain executives to make more informed decisions. Companies are leaving savings and revenues on the table by not properly integrating supply network knowledge into their decision-making. According to the McKinsey Global Institute retailers could increase operating margin by more than 60% by exploiting data analytics. In conclusion, in the big data game most companies are doing it wrong!
  2. Fragmented collaboration within and outside the organization creates barriers to intelligent supply chain planning even for organizations that do have a strong data analytics strategy. Research from Capgemini finds that 79% of organizations have not completely integrated their data sources across the organization. This created fragmented decision making, and leaves departments powerless to disruptions within the supply chain. Seamless data exchange gives teams a heads up when a disaster has taken place at a nework facility, and protects the overall brand from making promises it cannot keep to consumers. The situation is even graver when considering the lack of information exchange outside of the organization. Deloitte finds that 23% of supply chain executives monitor their third party relationships less than once a year and 10% do not do it at all. These practices leave supply chains exposed to a variety of risks; they also do not empower teams to be proactive in decision-making.
  3. The spent on big data structures, analytics services, and employee training too often outweigh the benefits. More data does not necessarily mean better insights, the power lies in understanding the meaning of the information and gathering the right data with a plan in mind. Across organizations there is a huge interest in harnessing the power of data, yet this comes with a lack of direction in data collection. Companies do not yet extract the value from the data that is widely available to them from various sources. Managing data intelligently requires identifying and prioritizing opportunities where knowledge can be most beneficial; it is crucial that companies embark on this mission with a clear end goal in mind. The research firm Gartner predicts that by 2020, 50% of organizations will actively measure and assess returns on analytics initiatives; the highest ROI will be achieved by leaders who know exactly what they are measuring and why.

Global supply chains are successful only through strong partnerships and the power of knowledge sharing.