Al Guarnieri, partner in the law firm of Parker Poe, details how the COVID-19 pandemic has impacted the planning efforts of manufacturers in the short, medium and long term.
The first impact of the pandemic came in the form of factory shutdowns in Asia. It quickly spread to the logistics of moving product to the U.S., resulting in higher costs and a scarcity of needed capacity. The fallout “has added a whole dynamic to the immediacy problem,” Guarnieri says. Producers must figure out how to keep their plants running, while managing cash expenditures.
Now that they’re well into the pandemic, companies are shifting to another level of planning, one that involves “more action rather than reaction.” They’re starting to get their footing, even as they continue to deal with the challenge of meeting demand. In some cases, buyers have been able to identify an additional source of product. But they still face substantial risks in their efforts to keep it flowing.
Products of high value and complexity are more difficult to source from alternative suppliers. Some companies are addressing the challenge by requiring suppliers to carry additional safety stock, as they develop plans over the medium term.
Longer term, they are seeking changes in contract language that provide some assurance of price stability, while allowing for exceptions in extraordinary circumstances. Geopolitical tensions must be taken into account. “Tariffs and tariff-related costs need to be accepted much more than five years ago,” Guarnieri says.
Questions remain about the effectiveness of force majeure clauses, which allow producers to waive contract requirements in the event of certain “acts of God.” Guarnieri cautions that force majeure “is not as perfect a solution as many companies think.” Other key contractual provisions should be addressed as well, he says.
Timely, incisive articles delivered directly to your inbox.