Directors' Outlook 2023: Supply chain risk

Supply chain disruption has been a significant issue for boards.  The Covid-19 pandemic, the conflict in Ukraine, sanctions and rising energy prices have taken their toll on supply chains, causing delays, price increases and the need to rapidly restructure supply arrangements.

Geopolitical tensions and conflicts could worsen in 2023, which will quickly impact supply chains further.  The preparedness and agility of businesses to deal with these shocks will determine how they fare in the global marketplace.

What we are expecting to see in 2023

A rise in force majeure disputes

Geopolitical and economic tensions have had a negative impact on international supply chains and will continue to do so over the course of 2023. As energy costs surge, the price of key commodities continues to rise and access to materials becomes increasingly difficult, businesses will need to prepare for the impact on their supply chains and, in worst case scenarios, potential supply chain collapse.

Consequently, we are likely to see an increase in force majeure disputes as suppliers struggle to fulfil their contractual obligations.  Being able to excuse yourself from performance of a contract on the occurrence of certain specified events outside of your control is clearly a valuable contractual right and one your counterparty may therefore seek to challenge.

An increased shift to friendshoring and nearshoring to bolster supply chain resilience

The volatility in international trade markets and ongoing issues with access to materials is likely to increase a trend towards domestic supply chains. Businesses may consider friendshoring and nearshoring, where supply is obtained from, respectively, like-minded and nearby trading partners, to bolster supply chain resilience.

Whilst nearshoring has been a method of supply chain management for some time, friendshoring is a relatively new concept – the impact of which will emerge over time. However, in the short term, businesses will need to consider what alterations to the supply chain will mean for regulatory approval should key components of a product need to change, as well as the impact on lead times and product delivery.

Cyber risk in the supply chain

Few major businesses will have escaped some form of cyber attack or data breach, which can precipitate the breakdown of trading relationships. Supply chains offer additional vulnerabilities for cyber attackers to exploit and present further entry points for criminals to infiltrate an organisation.

The latest UK government figures show that only 13% of businesses assess the cyber risks posed by their immediate suppliers during the procurement process, and less than one in ten monitor the cyber risks posed by their supply chain on an ongoing basis.

When it comes to cyber risk, organisations are only as secure as their weakest supplier. As businesses look to bolster the resilience of their supply chains in 2023, third-party cyber security processes and practices are something directors should prioritise when onboarding new suppliers.  Read more about our predictions for cyber and data risk.

Steps you can take to manage the risks

• Review your contracts for "force majeure" clauses. A force majeure clause generally excuses a party from the performance of a contract following the occurrence of certain listed events or circumstances beyond the reasonable control of that party. The wording of the clause is vital, as the term force majeure has no meaning of its own in English law.  Notice is likely to need to be given to the other party and it is important that this is given on a timely basis. The party giving valid notice under the clause will not be liable for its failure to perform its obligations, in accordance with the clause.
• Review your contracts for "material adverse change" (MAC) or hardship clauses. Such clauses set out an agreed mechanism for the adjustment of the contract if there is a material change in circumstances. A MAC clause does not need performance of the contract to have become impossible.  It can cater for circumstances where the contract simply becomes onerous or impractical. It therefore has potentially wider scope than a force majeure clause.
• Review supply chain risk. Ensure cyber risk is included in your procurement process and ensure that your suppliers' cyber risk strategies adhere to the standards set by your business. Communicate with your suppliers on a regular basis and ensure cyber risks are on the agenda.
• In the event of cyber fraud, act quickly – the likelihood of being able to trace and potentially recover misappropriated funds is correlated to the speed of response in obtaining information about the location of the funds and freezing bank accounts and other assets, both on a domestic and worldwide basis.

The final word

Preparedness is key when it comes to supply chain management and resilience. Review your supply chain contracts to assess potential risks and keep one step ahead to take advantage of opportunities. Dealing with risks and disruptions efficiently and appropriately will help businesses stay resilient throughout 2023.