Supply chains: how can we prepare for a potential recession?

With the recent news of the pound (£) falling to its lowest level against the dollar in over 30 years, there are increased fears that the UK economy is heading towards (if not already in) a recession. But what does this mean for supply chains and how do we manage our own supply chain, both upwards and downwards?

Communication

There is an implied presumption that both parties will act reasonably and deal with each other honestly and fairly,  as many contracts  state  that the parties will act in ‘good faith’. The ‘good faith’ concept goes beyond  reasonableness and means that there is an expectation for parties to work together to achieve the commercial objectives that the contract looks to cover.

Both suppliers and customers should be striving to maintain an open and transparent dialogue with each other. To have an effective and long-lasting supplier-customer relationship, the parties need to be able to talk to each other openly and liaise to find reasonable solutions that work for both parties.

Is there a need to vary the contract to reflect any agreed new terms? Yes – however, care must be taken to ensure that all variations to contracts are conducted properly in accordance with its terms. Most contracts will contain a variation clause depicting how variations become ‘legally binding’ – i.e. by both parties evidencing their agreement in writing.

Forecasting and delivery obligations

Forecasting is used as a tool in many contracts to assist both parties. This provides a customer with some comfort that a certain quantity of orders will be fulfilled by a supplier (once accepted). From the supplier’s perspective, it then has guaranteed orders and accordingly, guaranteed revenue. Considering this on an annual basis could assist both parties in overcoming any supply chain uncertainties and potential shortfalls in orders.

It is also worth checking what your contract says about delivery dates. If delivery or performance dates are estimates only, a supplier will have the flexibility to negotiate alternative delivery dates which they may have greater capacity / flexibility to fulfil.

Price increases

This is a particular concern in the case of long-term supply agreements, which can often contain terms providing for the adjustment of product prices. Depending on whether you are a supplier or a customer, do you have a right to vary / increase the price? If so, a standard price increase is usually linked to inflation and a pricing index (RPI or CPI), but your contract may also provide for a right to increase for specific factors, for example, the cost of raw materials increasing, or (if trading internationally) currency fluctuations. Be aware of what your contracts say and how you can enforce or push back on them.

Finally, with all things supply related, always be proactive and tackle any foreseen issues straight away. If you know of any potential manufacturing or logistics issues further up or down the supply chain, do not wait to address them until they are adversely affecting your business.

It is also important to regularly review your contracts to ensure that you are suitably protected if any issues transpire so you have a greater range of options to help mitigate the disruption and avoid breaching contractual obligations when the inevitable arises.