A legal perspective on supply chain volatility

Supply chain distress is making headlines: from the high profile administration of a parcel courier to wider issues in food and drink manufacturing and retailing. Now is the time to be aware of legal rights but not necessarily to exercise them.

Structural changes and geo-political events are causing great volatility in the food and retail supply chains. The administration of a high profile parcel courier points to overcapacity in the logistics sector, despite double digit growth in online spending. The closure of Russian-bloc markets and subdued demand in China has created oversupply of milk in western Europe and the UK. Good harvests in 2014 have led to oversupply of many farm commodities.

Oversupply tends to lead to reduced prices, which may be good for the consumer in the short term but is not necessarily good in the long term. Balance sheets of all but the strongest have been depleted by the financial crisis followed by seven years of recession and minimal growth. Many suppliers can no longer withstand the shocks caused by this instability, especially when the business confidence to borrow and seek investment has not fully returned.

The ripple effect

In this environment the buyer of goods or services, wherever they sit in the supply chain, needs to fully understand the consequences of terminating an upstream or downstream relationship before commencing potentially damaging action.  

As global motor manufacturers have found, the ripples caused by the insolvency of a small but critical supplier can cost millions of pounds to resolve. If a suppliers’ administrators are asked to continue supply, they will usually require all outstanding debts to be settled immediately, substantial price increases, onerous terms of supply and no warranties.

Provided that a degree of trust and transparency exists, assisting a supplier with a short term cashflow problem can sometimes avoid a much more serious problem.

Be clear on strategic goals and communicate

Make sure you fully understand your legal position, but be clear on your strategic goals before exercising your legal rights. Is continued supply (even in the short term) more important than termination and refusal of payment? Do you have multiple suppliers and stockpiles, or exclusive suppliers and just-in time-supply? Could a different approach either protect or improve your position in the short or medium term? How about early payment or a secured loan? 

Make sure you communicate internally when faced with supplier distress. The implications of supplier failure for your team may be minimal but for a colleague’s team may be huge.

If you do end up dealing with insolvency practitioners on a downstream supply chain failure, remember that they have their own goals which you may be able to align with your own. Usually an insolvency practitioner will want to sell the assets of the insolvent business as a going concern to get the best result for creditors. This will ensure continued supply for you in the short term at least. As many others have done, you may even consider buying the insolvent business from the insolvency practitioner to further protect your supply chain. 

If you have to deal with an upstream supply chain insolvency, check your retention of title provisions but also understand how important your goods (or services) are to the insolvency practitioners’ goals. If you are the critical supplier then negotiate from that position of strength.  

If you have any questions about the article or would like more information on how to deal with supply chain insolvency, please contact one of our specialists below.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Matthew Brown

Associate Partner

Solving companies’ financial issues is my passion and I specialise in restructuring and turnaround, working pro-actively to deliver innovative solutions in challenged situations.

Dominic Watkins

Partner - Head of Food Group

I am Head of DWF’s internationally renowned food sector group as well as being Head of Regulatory in London.