Galvanising your business against supply chain risk

The world continues to experience serious volatility, with major new global disruption events occurring on the back of multiple, previously unprecedented, disruptions seen since 2020. The impact on business continues to be significant, despite many having weathered previous events and sought to bolster protection against key supplier and customer distress. Conflict, geopolitical tensions, trade policy and energy supply volatility continue to expose and deepen financial distress, causing serious knock-on impacts across domestic and global supply chains.

Now is the time for businesses to critically examine their potential exposures, review whether legal protections in supply contracts may be ineffective, and enhance legal and operational protection. Specific legal and operational planning and on‑going monitoring processes – tailored to the jurisdictions in which the operations/exposure may arise – will significantly mitigate the risk and effect of customer or key supplier insolvency, increase optionality from an early stage, and enable resulting business costs to be minimised.

The key takeaway is that early action is vital – businesses that fail to take early action to enhance resilience to key-counterparty distress may be significantly exposed to wider consequences from unforeseen counterparty failure.

There remains significant scope for well positioned businesses to enhance value by implementing effective protections against disruption from supply chain shock, and seizing strategic opportunities to enhance offerings and implement operational efficiency, by being alert to competitors and supply chain businesses facing insolvency.

Outlined here are some key warning signs and a number of solutions within the legal and operational toolkit available to ensure businesses can take pro-active steps to re-assess their exposure, enhance resilience to customer and key supplier financial distress and, where possible, take advantage of market conditions which may arise.

Warning signs to look for

The following 'red flags' can be an indication of distress in your supply chain:

• Delayed payment/stretching of supplier credit
• Requests to re-negotiate payment terms, or requests for deposits and upfront payments
• Deteriorating service levels
• Spurious/unjustifiable claims
• CCJs, late filing of accounts, withdrawal of credit insurance, pending winding up proceedings
• Auditor’s report subject to qualifications
• New/additional security being granted to an alternative funding provider
• Market rumour/industry specific challenge/external shock
• Over-leveraged business
• Significant changes in management

Early action to recover assets or obtain payment

Where concern is identified with regard to a customer or supplier, early action is key to avoiding potentially large exposure as an unsecured creditor upon an insolvency.

At an early stage, key steps can be taken, including:

• enhancement of protective provisions in your terms and conditions of trade (for example retention of title clauses and early insolvency triggers);
• diversification of the supply of key goods and services;
• audit and inventory of stock held by customer where title has been retained;
• recovery action in respect of stock/suspension of credit terms absent payment of debts being made up;
• written reminders of directors’ duties/potential personal liability for directors acting in breach of duties to creditors and/or threat of early enforcement action/ commencement of insolvency proceedings to apply immediate pressure for payment;
• procuring payment on account/guarantee from third party for continued supply;
• the taking of security and guarantees to elevate and enhance creditor rights;
• securing provision of pertinent financial information;
• if potential “essential supplier” obligations, early action and termination of arrangements may enable a supplier to extract itself from being subsequently compelled to supply if customer enters insolvency;
• early engagement with a key supplier in financial distress will enable optionality to be identified to secure continuing supply (with/without financial support to the current supplier or by procuring continued supply from an alternative).

What are the options to protect my goods / my business from exposure?

Some useful steps you can take to mitigate against supply chain risk include:

• Reviewing supply terms to understand if current provisions will be ineffective upon the customer’s insolvency under UK legislation.
• Retaining title to goods supplied until all payments due from the customer are made (key legal provisions properly incorporated in supply contracts can be very valuable).
• Implementing periodic on-going monitoring:
• are customer accounts filed on time?
• any CCJs/winding up proceedings commenced?
• audit of stock segregation conditions at customer premises if holding goods supplied which are not yet paid.
• is credit insurance available?

• Reviewing financial position and payment terms.
• Monitoring and reviewing your level of credit exposure.
• Understanding if you are an essential supplier (of utilities/ certain IT services) which may be compelled to continue supply after the consumer enters an insolvency process?

How can I measure risk in my supply chain?

The following questions and steps can help you to understand the level of risk in your supply chain; and support you with starting to make contingency plans.

• Are any suppliers key to your supply/production operations?
• If a supplier ceased trading, what alternatives would be available and within what time frame?
• Monitor potential knock on impact on your ability to deliver an onward supply contract.
• In the event of supplier distress, would that provide an opportunity to acquire assets/bring part of production required for your business in-house?
• Be alert to key payment dates and risk of non‑performance following a staged payment.
• Implement legal vesting of title on staged production basis – protected and monitored by strong on site monitoring.
• Develop effective processes to identify early warning signs: use management information and financial data to test the resilience of key suppliers.

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