Boilerplate clauses can be more trick than treat

Happy Halloween! That cute little gremlin at your door is just a boilerplate clause in the contract with your leading supplier. You know which agreement I mean — the one where you get all your mission-critical raw materials. Who even reads those things anyway? They are buried on page twenty with all the other little ghosts and goblins, e.g., the choice of law clause (see earlier post on the UCC), the severability section, the publicity notice . . .all very innocuous, right? Take a closer look. There really is a monster under that costume, and its name is the force majeure clause.

Force majeure literally means "greater force" and in the supply contract arena, it typically denotes a provision that excuses a party’s performance when unforeseen circumstances occur that inhibit such party's ability to deliver what they have promised. Just today I was reading an article in Nation's Restaurant News about the effect of weather on seafood production and shipments. It seems that an unusually busy hurricane season has wreaked havoc with many restaurants’ supply chains. The Uniform Commercial Code (a set of uniform rules enacted in all states that govern commercial contracting) even provides a free pass to parties when force majeure events occur that render performance by a party "impracticable". (See UCC Section 2-615). The typical clause might say something like:

"The undersigned agree that no party shall be liable for its failure to perform its obligations hereunder during any period in which such performance is delayed by extreme weather, fire, war, embargo, riot, labor strike, or any other event or condition outside the reasonable control of such party."

These clauses garnered some attention after the September 11 attacks, and then returned to relative obscurity. Given the current economic environment, we can expect to see them invoked more frequently by defaulting parties proclaiming the transactional equivalent of "the dog ate my homework". (We have a newly adopted rescue pup, and this no longer seems to be as lame of an excuse as I once thought.) If you want to avoid being on the losing end of this scenario, it may be time to pay some attention to the boilerplate clauses in your contract. Consider customizing the force majeure clause in your key procurement contracts to exclude things that sophisticated manufacturers and distributors should actively be managing around, including known risks in your particular industry. An emerging trend is for suppliers to develop, and commit to follow, detailed contingency plans. You may want to ask your suppliers for copies of their disaster plans and review them for sufficiency and practicality, then make the accepted plan part of your contract.

Just be prepared, your customers may start asking the same thing of you.

-- Heather Mallard

UNCG to create supply chain management program

The University of North Carolina-Greensboro has obtained a $76,479 grant to develop a supply chain management program.

Kwasi Amoako-Gyampah, head of the Department of Information Systems and Operations Research at UNCG's Bryan School of Business and Economics, won the grant from the Piedmont Triad Partnership. The program will train business executives in supply chain, logistic and transportation matters.

“The worry is that supply chain and logistics managers are retiring without senior-level managers to take their place,” said Amoako-Gyampah. “Developing a professional program to train managers in the field of SCLTM will help fill a need in the Piedmont Triad Region as it transitions into the new economy.” The first students are expected to enroll in the Fall 2009 semester.

This is an exciting development for North Carolina's Piedmont Triad, which is rapidly becoming a hub for supply chain management. The region already is home to several logistics companies and a major Federal Express hub is scheduled for completion in 2009 at Piedmont Triad International Airport.

In fact, a key factor in Womble Carlyle's decision to start a Supply Chain Management Team was our long-standing presence in the Triad market. The firm has Triad offices in both Greensboro and Winston-Salem.

Supply Chain Management and the Financial Crisis

We all know that the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law last week. But none of us really know what effect it may have on the ongoing financial crisis, declining economy and credit crunch -- or when. It does seem safe to predict that the economic outlook and credit markets may remain bleak for some time now and that businesses would be wise to plan accordingly. Consumer spending for the just-concluded third quarter is expected to decline - the first quarterly decline in two decades, banks aren't lending, borrowers can't get credit and inflation seems likely to trend up.

In periods of economic uncertainty, supply chains are guaranteed to be stretched and disrupted and supply chain management becomes even more important. Many businesses will feel the impact on both ends. Buyers and consumers, who lack access to credit and have reduced spending in reaction to the soured economy, will be cutting back on, if not eliminating, discretionary purchases and flocking to lower cost alternatives where available. Buyers will likely stretch out payments, so that suppliers become their de facto credit source. Monitoring accounts receivable, assessing the credit risk of buyers and requiring credit support where appropriate will be key.

Likewise, businesses likely will experience difficulties with their suppliers. Suppliers unable to finance working capital will feel the impact on production and may find themselves delayed in meeting or unable to meet their buyers' needs. Businesses should plan ahead, if they have not already, and explore alternative sources of supply and ways to accommodate delays. Inventory management and warehousing may need to be reassessed. Businesses may wish to "grow" their inventory in indispensable items or items with single sources of supply. Product design may even need to be reassessed.

In short, businesses need to anticipate not only problems arising from their own difficulty in obtaining credit and operating in an economic downturn, but the difficulties that these conditions impose on their suppliers and buyers. For any business that has not mapped its supply chain, now is the time to do so. Identification of strategic suppliers, whether of design, labor or material, will be key, as will maintaining strong collaborative relationships up and down the supply chain.

-- Jackie Camp