Supply chain has been severely impacted by the COVID-19 pandemic and New Zealand is swiftly moving through the lockdown levels.
In the last few weeks businesses that are buying have been forced to act quickly, often with limited staff resources to deal with issues in connection with existing contracts, planned procurement and reactive/live procurement.
The issues vary from business to business and range from delays and cancellations to introducing new procurement processes and new contract clauses to capture events like COVID-19, for example new or strengthened business interruption and force majeure clauses.
This article focuses on purchasing businesses in the private sector and explores some of the immediate and future changes that a purchaser will need to consider as we navigate the next few months as the economy gradually reopens under Alert Level 2.
Although the public sector Government Procurement Rules do not apply to the private sector, it is worth reflecting on those rules and considering if they can be drawn on as best practice in procurement when managing change and negotiating. The related Principles of Government Procurement may also assist to set up a framework for negotiations. Those Principles include an obligation to be fair in how suppliers are assessed, to make balanced decisions, to stay impartial and to be accountable, transparent and reasonable.
In this uncertain trading environment, category managers should be carefully reviewing each of their strategic supply relationships. Interruptions to supply chain, delays in shipping and changes in customer requirements require purchasers to act promptly in securing the goods and services that their businesses require. It may be desirable to extent or renew critical supply relationships, while seeking to exit or suspend those supply relationships that are no longer required.
Before launching in to negotiate changes, the purchaser should carefully review the terms of the contract and consider how the overall supply relationship fits within the purchaser's short, medium and long-term strategic objectives.
In particular, purchasers will need to consider:
- If their business can manage without supply of the goods or services for an extended period;
- If the supply of the goods or services is critical, whether an extension of existing contractual terms should be explored to ensure certainty of contract and continuity of supply;
- If there is an exclusive supply relationship or minimum quantity commitments, whether interruptions to supply would permit the purchaser to seek alternative supply arrangements under the terms of the contracts; and
- If product lines have been changed, limited or consolidated, whether a direct supply relationship can be implemented to allow the buyer to go directly to a specified manufacturer.
It goes without saying, but it is important to ensure that the purchaser has a strong understanding of the relationship between price, volume and term. If variations to the contract, or an extension or renewal to the term is being sought, the purchaser should be clear on the parameters they are willing to negotiate within. Any current key performance or relationship issues should also be addressed.
It is uncommon to have unilateral variation, termination or renewal rights in supplier contracts. In most cases, commercial negotiation will be required, and any process outlined in the contract should be followed or varied to fast-track the process by mutual agreement.
Delaying, extending or cancelling a procurement process
Due to COVID-19 and the lockdown challenges, many businesses haven't been able to continue with their procurement processes, and prolonged disruption even as we move through to Alert Level 2 is likely. Taking the decision to cancel or delay a procurement process is a serious undertaking for a purchaser.
It is not only purchasers who are disrupted and unable to operate remotely, many suppliers cannot operate and this has impacted aspects of planned procurement processes. The need to delay or vary the procurement process is mutual and will continue during different alert levels during lockdown.
In certain circumstances the purchaser should consider if cancelling a tender process is an option. Otherwise, using a different approach to evaluate responses and complete the approval process might be required.
Where a procurement process is close to completion, it is likely that it won't be practical to transition to new suppliers as planned and extending the timeline for such a transition might be required. Examples include virtual site visits, integration meetings and training presentations.
Some key considerations include:
- Whether participation will be limited due to suppliers being impacted by COVID-19 lockdown. Will the respondents to the tender be a fair representation of market competitors and are there any concerns regarding financial position of respondents.
- Whether the usual evaluation and approval processes apply during the COVID-19 lockdown, even as we move to Alert Level 2.
- Can the required presentations, site visits and other steps be completed remotely or by using virtual options?
- Whether the ability to have management and board sign-off in the current environment will be in impacted. Is this a priority for the business?
- Can external advisers offer the level of support and advice required to progress with current process?
- Are suppliers working remotely and will their team be able to progress the current process as planned?
Is there a force majeure clause and was this contemplated in the procurement process?
Whether or not force majeure applies to relieve the purchaser or supplier of their contractual obligations will depend on the terms of the particular contract. Where there are force majeure clauses, it is common for them to exclude pandemic or similar events (or the effects of such events) that could have been reasonably avoided or mitigated.
COVID-19 has caused many businesses to pay close attention to force majeure clauses and realise that strengthening contractual provisions is one aspect. In addition, the COVID-19 experience has highlighted the need to improve the procurement process to ensure suppliers turn their mind to how they can mitigate the impact of such events on their ability to supply the goods or services.
Purchasers will no doubt be placing more importance on a supplier's ability to manage an event of this nature and ensuring the tender response from a supplier details what reasonable steps or precautions the supplier will implement to avoid or mitigate the effects of these sorts of events. Purchasers may wish to include clauses in their supply contracts requiring suppliers to maintain and share their business continuity plans. Such plans should include the following requirements:
- Early notification of potential risk to supply as a consequence of a force majeure event such as COVID-19;
- Communication plans for providing regular updates until the issue is rectified;
- Where the supply relationship is critical, prioritisation of the purchaser's supply; and
- Any other requirements or recommendations specific to the purchaser's industry that are necessary to minimise the risk of business interruption.
The force majeure clause may then reference those steps and precautions that should be implemented before a supplier can claim relief under the force majeure clause.
It is likely there will be heightened attention on the contractual allocation or risk in these events and a balance will need to be struck to ensure certainty and continuity of supply occurs and relationships are not strained.Download article in PDF format
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.