Over the last few years, some commercial businesses have struggled with Chinese supply chains and vendors under the threat of U.S. tariffs. Now, businesses need to think about and strategize their supply chains and vendor considerations with the novel coronavirus (COVID-19) outbreak.

Review supply sources and vendors

Review all of your supply sources and vendors.  Who makes critical items for your business?  How much inventory does your vendor have and where is the inventory located? For example, Susan Freed wrote recently that some healthcare providers need to review their supply chains for medical supplies. If there is not enough inventory, find alternate sources.

Consider your long-term operational and supply chain planning as well. Many North American based companies are re-evaluating their supply chains and considering where to locate future operations. 

U.S. Commerce Secretary Wilbur Ross recently suggested risk factors such as the recent outbreak need to be taken into account when considering where to locate operations.  He expects more production to move to North America.

Gather accurate intel

If you have concerns about a specific Southeast Asian source, keep in contact with U.S. authorities as well as Southeast Asian friends and colleagues on the ground.  For example, the American Chamber of Commerce in China (AmCham) has been providing excellent, useful information to help U.S. companies gather accurate information from the Chinese Government.  It can assist in setting up best practices in communicating with the Chinese suppliers, the Chinese Government, and others in light of the current situation.

Misleading claims

Beware of misleading statements from your vendors. Certain Chinese manufacturers have been making misleading claims that they are operating and/or shipping on a timely basis and are continuing to accept deposits.  Some distributors with Chinese sources have been making similar claims. 

For smaller purchases, consider payment due upon receipt of products.  If that is not possible, make payment by irrevocable letter of credit payable on receipt of products.  If a deposit is the only option, find a third party to make sure the product is available and can be shipped in accordance with the agreed-upon terms. 

Verify shipping methods

Even if the vendor is able to make the product available in a timely fashion, transportation may not be available.  Cargo shipments and flights out of China are being reduced or canceled due to labor shortages and other health concerns.

Contracts and force majeure

Examine your contract clauses, especially force majeure. These sorts of clauses are generally intended to excuse a party from performing due to causes that are beyond that party’s control.  However, many contracts contain force majeure clauses with differing wording. Reasonable foreseeability, advanced notice of an event, and even specific reference in the force majeure clause to governmental or regulatory action (i.e., travel bans and lockdowns) may come into play.  If you have questions about these sorts of events and clauses, do seek legal guidance.

Insurance

If your operations are significantly affected by these events, check your insurance policy to determine whether a claim for business interruption is warranted.  If you have questions about your policy, talk with your broker, insurer and/or attorney.

The Big Picture

COVID-19 is forcing businesses to evaluate and strategize their supply chains, but there’s more to consider as well.