Now is the time to assess your supply chain exposure, build your resilience and emerge stronger, whatever the future may hold

Residents who live in earthquake-prone areas will know that, in the aftermath of a large quake, one of the most important things they can do is to prepare for the aftershocks that follow. In the worst case scenario, what they have experienced may have been a foreshock, preceding an even larger natural disaster that can cause far more devastation to buildings and infrastructure which have been weakened.

Businesses still grappling with the effects of the global pandemic, supply chain disruption and mounting inflation would do well to heed a similar message. Contractual agility, risk mitigation and business resilience should be strategic priorities, often ahead of growth and lean processes. This starts with assessing and contingency planning your supply chain.

Here are five things your business can do to ensure you are in the best position to meet whatever challenges are coming down the track:

1. Assess your business-critical contracts

A robust vendor contract management strategy will help you to identify the biggest risks to your businesses. Try adopting a similar approach as you would to health and safety risk assessments, to give appropriate weight to:

• the likelihood of certain types of supplier failure, ranging from a missed delivery to insolvency; and
• the impact of that failure, taking into account the contract value, whether it relates to a critical component and the downstream contracts that are dependent on it.

Your report should identify the steps that are already being, or which might be, taken to mitigate those risks. This will help you to prioritise the actions that you need to take now, and to keep track of progress by regularly updating the assessment.

2. Consider your options

Once you have identified the contracts that present the highest risk, you will need to make contingency plans in case you need to switch suppliers. Factors to consider will include the number of alternative suppliers, likely costs and lead-in times, and their financial stability and reputation in the market.

You might also need to consider (and take specialist advice on):

• whether switching suppliers risks infringing any IP rights, such as branding or licensing; and
• how to establish ownership of IP that might have been created for the purposes of the contract, and how to transfer know-how that might have been developed in relation to bespoke or specialist goods and services.

The next step will be to review key contractual terms. Do your contracts contain cost control clauses to provide for spikes in commodities or exchange rates? What are the triggers and consequences for force majeure clauses? Do they provide fault/no fault termination rights?

Care needs to be taken before attempting to terminate a contract, whether exercising a contractual right to do so or for non-performance. Getting termination wrong can leave you on the hook for the supplier's lost profits for the remainder of the contract.

3. Work with your suppliers

Switching costs, loss of goodwill and legal risks mean that terminating a contract should be the option of last resort. You may first want to consider how you can support key commercial partners to trade through temporary difficulties. This could include:

• revising credit terms to improve their cash flow (ensuring that if you make payment before delivery, you acquire title to goods before doing so); and
• supporting the supplier's financial management. This can include developing a rescue plan, providing assurance to financiers, or supporting an application for business support grants.

If this involves providing credit relief, it is advisable to require that the supplier provides detailed real-time financial information and forecasts.

4. Revisit your procurement strategy

Conventional business wisdom used to prioritise just-in-time models that depended on an efficient, global supply chain. Now, many are placing a greater emphasis on building resilience through greater diversity in their supply chains, nearshoring and vertical integration of critical suppliers.

Contractual risk mitigation is another vital part of an effective procurement function. This might involve allocating specific risks, such as currency fluctuation or regulatory changes, at the outset. Suppliers might also offer options such as production, warehousing or hosting (for IT services) in specific locations, or other agile models, with cost implications.

The process of risk-assessing your contracts may also highlight common areas of risk that you can address by refreshing your standard terms and contract negotiation guidelines for commercial teams.

5. Emerge stronger

In the aftermath of the devastating 2015 earthquake in Nepal, a huge amount of reconstruction took place, with an ethos of "build back better". The result was schools with integrated solar panels and back-up electricity supplies, roads built with improved safety features and better water sanitation facilities that benefited residents.

For businesses recovering from recent shocks and preparing for future disasters, the effort that goes into contingency planning can pay dividends, even if the worst never happens. Greater awareness and monitoring of supply contracts can help to control costs and identify efficiencies; training commercial and procurement teams reduces the instances of costly disputes; and supporting suppliers can enhance long-term commercial relationships and market reputation.