Negotiating Big Weather Concerns In Supply Chain Contracts
To illustrate, in 2020 more than 20 weather and climate disaster events cost billions in damages to supply chains, causing significant disruption and worldwide challenges for manufacturers, shippers, carriers and customers. The 2020 Hurricane season was a major event (including Hurricanes Laura and Sally) even though logistics companies had advance notice of at least a week to prepare by transporting assets and water to the safest areas for later use. Predictions for 2021 (with Hurricane season kicking off June 1) is that it will be another above-normal season. The growing intensity of natural disasters in the face of climate warming poses risk to supply chains making updating risk and contingency plans a must including taking into account of the risks associated with expanding routes into disaster-prone areas.
Weather disasters come in different shapes. 2020 was also a record-breaking year for wildfires across California, Colorado, Oregon and Washington. Again, billions in damages were suffered. Climate change plays a significant part in the frequency and intensity of these disasters – as the planet warms, the risk of drought increases and lengthens the wildfire season. Wildfires force closures and delays in freight movement as roads and rail lines are closed. But wildfires, unlike hurricanes, come with little advance warning requiring supply chains to constantly react to disaster.
Tornadoes, unlike hurricanes are also hard to predict forcing supply chain leaders to consider signs that conditions for severe weather are likely. Some signs of these severe weather outbreaks can be noticed 5 to 7 days in advance. Speeding up shipments in advance of the storms when these signs are present can mitigate damages. Many distributors fortify facilities and suppliers create relationships with businesses located in the severe weather prone areas to facilitate plans for back-ups or advance shipping.
Manufacturers and suppliers prepare for disaster events in different ways. Drills and relocation of back-up inventory and supplies so that needs in the disaster areas can still be served are mitigating approaches.
Truckers are trained and retrained to be prepared for severe weather. Failing to safely negotiate the weather challenges impacts profitability and impacts safety scores and therefore insurance costs. Because day to day concerns taking priority, sometimes weather training has to be handled remotely and through simulators.
Self-driving systems have some technical advantage over human drivers because they can sense and acquire information faster permitting a quicker reaction time and can see a broader view using radar, cameras and LIDAR. Sensors operate in spite of shadows and bright lights. Certain robotic driving systems are being built to drive in extreme weather and can detect weather that may delay truckloads. AI systems are being tested in a range of weather conditions to see how they react and safely handle significant challenges.
These weather events will all likely constitute events of force majeure and having a contract that relieves the manufacturer or supplier of liability for performance will not help a franchisor recover from supply chain disruption. Rather franchisors are dependent on how prepared their manufacturers and suppliers are to address natural disasters – and must be able to legitimately rely on the manufacturer’s and supplier’s preparation and execution of business continuity, disaster recovery and crisis management plans. All of the damage mitigation approaches addressed above are important parts of any business continuity, disaster recovery or crisis management plan. Transparency to such plans is paramount. By understanding such plans and working together with the manufacturers and suppliers, franchisors can also decide whether they need to diversify suppliers, implement redundancy of processes, obtain back-up inventory, add additional resources and obtain or increase supply chain disruption insurance. When contracting with any manufacturer, supplier or transportation concern, franchisors should expressly address the manufacturer’s or supplier’s required compliance with the plan in the contract and request a copy of the plan and any updates.
Failure to maintain current plans, execute them as required and maintain the required business interruption and supply chain disruption insurance with franchisor as an additional insured are all mainstays of any contract’s default provisions.
Further, anticipating supply chain disruption in the contract should permit the franchisor to seek products and services elsewhere (hence the need for diversity of suppliers even if in situations where there is an exclusive or requirements contract at issue). How a manufacturer or supplier addresses disasters should also be part of the key performance indicators used by a franchisor to measure supplier performance allowing for pain or gain treatment (credits and setoffs) of pricing for products and services if the manufacturer or supplier fails to adequately perform.