7 Solutions to Mitigate Global Supply Chain Risks
In a globalized economy where finalized products have components manufactured all over the world, effective management of supply chains is critical. Each party in the supply chain is dependent upon the other parties performing their responsibilities. If one party fails to perform its responsibilities the consequences can cascade both up and down the supply chain, creating legal exposure for other parties. Michael D. Parrish, a partner at Fasken Martineau’s Insurance and Product Liability Practice Group, suggests adopting these habits to reduce and mitigate risks faced by supply chain parties.
1. Know your supply chain neighbor. Manufacturers need to know their component and material suppliers as well as the businesses distributing and selling their products. Suppliers, distributors, and retailers should also know their manufacturers. These parties must also conduct due diligence to make sure the other parties are reputable and capable of consistently supplying the parts promised.
2. Match your exposure to involvement. A supply chain party should not assume liability exposure which dwarfs the profit created by the transaction or relationship. For example, a component supplier making a one dollar profit on a widget should be reluctant to assume unlimited liability exposure for the upstream use of that widget, particularly where the use of the widget is outside of the supplier’s control. Otherwise, that supplier has essentially become the world’s cheapest insurer of the upstream parties.
3. Create comprehensive and robust contracts. Without good contracts, a manufacturer may be fully exposed to liability — without protection and legal recourse against the responsible party — and at the mercy of the laws of other jurisdictions. It is critical that manufacturers and other supply chain parties have comprehensive and robust contracts for key relationships which set out the rights and obligations of the parties in a way that reasonably allocates risk among the parties.
4. Have interlocking indemnity clauses throughout the supply chain. The object of the clause is to contractually shift liability for losses and claims from the innocent party to the responsible party. While indemnity clauses can be unilateral, it is not uncommon for supply contracts to have mutual indemnity clauses. Despite their importance, indemnity clauses are often poorly drafted, overly broad, and misunderstood. As a result, indemnity clauses should receive special scrutiny in any contractual negotiations.
5. Maintain sufficient insurance. Manufacturers and other supply chain parties often find themselves uninsured or underinsured in product liability claims and other supply chain disputes. Consumer and food product recalls and class actions, for example, can easily create liability exposure in the millions, or tens of millions of dollars, so it is important to understand and insure for such risk.
6. Seek home court advantage. Dealing with foreign supply chain parties poses particular challenges for domestic parties: communication can be slow, gaining access to information and documents can be difficult, you may be exposed to foreign legal regimes, and the foreign party may be outside the jurisdiction of Canadian and U.S. courts. All of these factors create increased risk for North American manufacturers. The best way to mitigate the risks of dealing with foreign parties is to secure home court advantage through choice of law, choice of forum (courts), and/or arbitration clauses in supply contracts or terms and conditions.
7. Pay attention to details. Ensure that contracts are properly executed, and that all insurance policies, contracts, and commercial documents relating to the purchase and sale of any products, components, or raw materials are organized and preserved. Good record keeping will often make or break product defect claims.