The coronavirus pandemic is just the latest disruption to hit global supply chains, and endanger the stability of key suppliers. But many retailers don’t seem to have learned the lesson of past such events. They’re more likely to stick to the language of a contract than seek to understand the plight of suppliers. In this conversation with SupplyChainBrain Editor-in-Chief Bob Bowman, David Holme, Chief Executive Officer of Exigent Group, urges a whole new approach by buyers to the problem.
SCB: How should retailers and suppliers be addressing their contractual obligations in the face of supply-chain disruptions caused by the coronavirus crisis?
Holme: It’s one thing having a contract, and another that is commercial reality. If you have a relationship with your supplier that is strictly contractual, then there's going to be a world of difficulty. If your supplier is a strategic partner, then there has to be a very honest conversation. You go back to the reason you contracted with A, B or C in the first place — you did that because you believed in their ability to supply, and in their honesty.
My advice is to understand what's in the contract completely — what the supplier’s pressures are. That's a reasonable place to start the conversation. I'll give you an example. Let's say you're a retailer with a landlord, whose problem is likely bank debt. If you’re compassionate and sensible about this, you're going to talk to your landlord about his problems first, then come back to yours, because then you can fashion a joint solution. If you think that relying on a contract is going to solve the problem, then that's just commercial naiveté in my view. I will tell you that plenty of people are doing that —rushing to find that one clause that will save them. It isn't going to save them. It's going to be a commercial negotiation that will best inform how they should work through this.
SCB: All the same, aren’t we seeing a big increase in the number of contractual parties declaring force majeure?
Holme: Yes. The financial crisis was 2008, when everyone was talking about risk and force majeure clauses. They’ve had 10 years to prepare for this. Now we have a massive upsurge of people saying, “What have I agreed to?” And in the majority of cases, they still don't know [what's in the contract]. That is what I call epic negligence. If it isn’t the greatest abdication of risk management since 2008 or 2001, I don't what is.
SCB: So they dropped the ball on that. But now they have to deal with the situation of the moment. So what can retailers do if they're having problems supplying or receiving goods, paying rent, or meeting contractual obligations?
Holme: The first thing is to set up a tripartite approach. You need to look at finance, procurement and legal. Then go to each of your suppliers to understand their problems. Because you can't rely on a contract if your supplier can't deliver on it. What will save you is commercial common sense. To do that, you need to know what you can afford, what your financial constraints are, and what the supplier’s position is.
SCB: And going forward?
Holme: If you want to continue trading, then you're going to have to come to a commercial alignment. You've got to recognize that these guys have to survive too, because otherwise it’s just going to end up in court. Do not think that you are going to fix this through legal.
SCB: When this pandemic and the current economic crisis is over, what lessons should retailers be taking from this experience that they didn't learn last time?
Holme: This is the third epidemic in the last 20 years. It shouldn't be news, right? You have to fashion a new commercial arrangement, think about what that means for you and your suppliers when it happens again. I would tear up 80% of those retail agreements, to be honest with you. You're going to have to have some conversations that are extremely uncomfortable. Retailers have to understand that their suppliers are going to be periodically financially stretched. So a new stress test will be needed. You’ll have to do some collaborative financial analysis that talks about how we’re all going to get through this. Your supplier is only as good as their supplier of finance or of goods.
SCB: It requires a whole new way of thinking.
Holme: It’s a conversation about your supply chain. People have to better understand the challenges and opportunities. And that is completely new. Empathy and understanding of suppliers’ problems is the only thing that will save retailers, in my view.
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