Womble Carlyle Supply Chain Management Blog

Supply Shortages Should Be A Contract Consideration

2011-10-26T16:06:00.000-04:00

As I was flying back from Denver, where I was a presenter on a panel addressing contract drafting and negotiating at the Association of Corporate Counsel Annual Conference, I looked through the Wall Street Journal. One article was particularly interesting – “Wary Firms Are ‘Destocking’” (subscription required).

Seems that DuPont and 3M are reporting that manufacturers are starting to reduce their raw material inventories as they hedge what may be a worsening economic forecast for 2012. This reminded me of a section of the ACC presentation where we discussed force majeure clauses and how they have become much more than simple “boilerplate” in commercial contracts. Typically, the force majeure clause addresses “acts of God” that are beyond a party’s control and will excuse non-performance under the agreement. Over the past several years, I’ve seen “shortage of materials” find its way into force majeure clauses.

As we mentioned at the ACC conference, buyers need to be aware of the inclusion of a “materials shortage” provision that might excuse performance by your supplier. In light the WSJ article, this risk may be increasing. I think it may be appropriate to include as a force majeure event an industry-wide materials shortage affecting everyone – conversely I think it is reasonable for a buyer to expect a supplier to manage its own supply chain to maintain materials supplies sufficient to meet orders.

Also, consider adding to your standard force majeure clause provisions addressing how remaining inventory or production capacity will be allocated during a force majeure that limits, rather than cripples, production by your supplier.

- Greg Chabon

Higher Gas Prices Putting Squeeze on Supply Chains

2011-06-08T15:24:00.001-04:00

So as Summer gets here and we’re all gnashing our teeth about oil and gasoline prices as we try to head to the beach, the mountains, or elsewhere, I was interested to see Michael Koploy’s recent blog post discussing some very interest data on oil and gasoline prices and their effect on supply chain links.

The one that I found most interesting is that the cost to ship a load of tables and trade displays from Orlando to Seattle increased almost 32% from 2010 to 2011. While paying more at the pump is irritating to all of us as consumers, the effect of higher oil and gasoline prices on supply chains is truly eye opening.

- Greg Chabon

The Impact of the Japanese Disasters on Global Supply Chains

2011-03-23T16:38:00.001-04:00

In the wake of the terrible and multiple disasters in Japan, global markets and companies everywhere are being reminded of the impact disruptions anywhere, and especially in key markets like Japan, have on supply chains. The New York Times published an article earlier this week, highlighting this issue and it is a definite “must read.”

One of observations the Times makes that I find intriguing is this: Commenting on the potential disruptions of global businesses, the Times noted “The good news for the world’s manufacturing economy is that the sectors where Japan plays a vital role are fairly mature, global industries. Consider computing and electronics. For major components, like semiconductors, production is now spread across several countries. By contrast, in the early 1990s, virtually all 486-microprocessors — the engines of the most powerful personal computers of the time — were made at a single Intel factory near Jerusalem.”

The disruption in the computing and electronics sector is muted due to strategic diversification of production. The lesson is clear – review your supply chain now, identify those weak links (sole or single-source, heavy concentration in a single geographic location, etc) and take steps to start diversifying sourcing. It may not be a tsunami, a nuclear reactor accident, or other major tragedy. It could be a labor strike, flu epidemic or other less dramatic event that could disrupt your supply chain.

Consider disruption planning to be a requirement in your supply agreements for key vendors, and review those plans. Have your key suppliers identify their alternatives to keep your supply intact. If you are the sole source vendor to a key customer, discuss with them how they can help you diversify (warehousing, maybe even some capital investment to set up parallel production).

- Greg Chabon

New Report on Warehouse Management Systems Market Trends

2011-02-17T16:41:00.003-05:00

Blogger and market analyst Michael Koploy has written an report on "2011 Market Trends: Warehouse Management Systems." Just thought this might be of interest to some of our readers.

The Battle of the Forms

2011-02-07T15:46:00.002-05:00

My partner and Supply Chain teammate Heather Mallard and I recently presented a Webinar on “Drafting and Interpreting Contracts” for the Association of Corporate Counsel (ACC), following up on our preparation of an InfoPAK for the ACC on the same subject. Of course, concepts of Supply Chain Management were infused throughout both of these projects. One area we discussed was the ever-present “battle of the forms.”

The “battle of the forms” erupts when a buyer and seller of goods each use terms in their purchase order, acceptance, or other communication that can form the basis for an agreement under the UCC. Under U.C.C. § 2-207, a “definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is made conditional on assent to the additional or different terms.”

U.C.C. § 2-207 provides the rules governing which terms form the basis of the contract when parties exchange different invoices and terms and conditions. When each side uses standard forms of PO’s, acceptance, etc., you can easily get unintended results as to what the exact terms of the sale of goods are, based on trying to consolidate these differing terms.

And often the results are unpredictable as well. In a recent case (Henry Avocado Corporation v. Polo’s Produce, Inc.,2010 WL 4569136 9 (E.D. Cal.)), the United States District Court for the Eastern District of California found that a provision for attorneys fees and pre-judgment interest were part of the agreement between the merchants related to claims under the Perishable Agricultural Commodities Act (“PACA”).

In this case, the plaintiff’s invoice contained a provision allowing it to recover its reasonable attorneys fees and interest on unpaid invoices. The Court noted that PACA was silent as to both issues. The Court then determined that the provision in plaintiff’s invoice form became “part of the contract under section 2207 of the California Uniform Commercial Code” (equivalent to §2-207 of the model UCC). The Court then quoted the salient language of the California UCC provision: “This statute provides that new or different terms added in an invoice, for example, ‘become part of the contract unless: (a) The offer expressly limits acceptance to the terms of the offer; (b) They materially alter it; or (c) Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.’”

The real kicker was the finding of the Court that “neither the interest nor attorneys fees terms materially alter the contract for the PACA goods,” and therefore the additional terms became part of the agreement.

Determining if the terms of your company’s agreements for the sale or purchase of goods governed by the UCC are clear requires, among other things, dealing with the “battle of the forms.” Make sure your standard terms on clear on how new, different, or conflicting terms are handled.

- Greg Chabon

The Trend toward Smarter Supply Chains

2010-08-30T17:02:00.001-04:00

Dan Gilmore’s column this month in Supply Chain Digest (which if you don’t read regularly, you should) is titled “What is a Smarter Supply Chain?”

In his article, Dan summarizes the latest renovation of the concept of intelligent supply chains. IBM has stated that, utilizing improved technology, “smart” supply chains will reflect three important components:

Instrumented: Supply chains will be supported by pervasive data collection networks that provide real-time visibility; pallets will “report if they wind up in the wrong place.”
Interconnected: We will have system-to-system integration up and down the supply chain, not only to trading partners but to machines and inventory (shop floor to top floor).
Intelligent: We will achieve better supply chain decision-making through advanced analytics and next generation optimization software

The growth of electronic records and data tracking has made most of us believe it is commonplace to implement automated systems. Because I can find out in seconds exactly where my package is, I want that same visibility for other important items (for example, my medical records).

While the application of technology to create smart supply chains will be a very welcome, and ultimately cost-saving, development, it does raise the bar on how companies will share information, develop the IT tools to implement these systems, and share liability when things go wrong. Intellectual property issues will become increasingly important and a key issue to be considered by any supply chain team.

- Greg Chabon

U.S. Ranked 15th in Global Logistics Performance Survey

2010-02-18T11:27:00.000-05:00

The World Bank has ranked the world’s nations in supply chain and logistics performance and infrastructure, and the United States ranked 15th in the world, dropping one place from the 2007 rankings.

Western European nations dominated the survey, with Germany taking the #1 spot. The previous top-ranked nation, Singapore, dropped to #2, with Sweden, The Netherlands, Luxemburg, Switzerland, Japan, the United Kingdom, Belgium and Norway rounding out the Top 10. The U.S. also ranked behind Ireland, Finland, Hong Kong and Canada.

The survey polled international freight and third-party logistics management companies and ranked 150 nations. Nations were graded on the following criteria:

Efficiency of the customs clearance process.
Quality of trade and transport-related infrastructure.
Ease of arranging competitively priced shipments.
Competence and quality of logistics services.
Ability to track and trace consignments.
Frequency with which shipments reach the consignee within the scheduled or expected time.

While the United States’ performance on the survey was not disastrous, it does indicate that U.S. business and government leaders should be keenly attuned to our competitive advantages and disadvantages in the global supply chain. The World Bank report shows that many of our toughest economic competitors are ahead of us in this critical area, and we need to catch up.

-- Greg Chabon

Article discusses the importance of supply chain mapping

2009-11-12T10:52:00.000-05:00

In a recent article, Supply Chain Digest offers thoughts on Supplier Relationship Management that echo comments made to the Triad Business Journal regarding the important first step of mapping your supply chain.

The Digest article states that there are 6 key steps to Supplier Relationship Management, with the first being “to segment supplies and identify a subset of those as ‘strategic.’ The most frequently used segmentation criteria, according to Webb and Hughes, are spend (historic, forecast or both), value opportunities, dependency, risk and business impact, account attractiveness and relationship complexity.”

In a nutshell, this is mapping based on the items a company actually buys, and triaging them based on “strategic” criteria – which items are mission critical to production, which items have a high per-unit cost, which items are a big-ticket expense (even if per-unit cost is low), etc.
The article stresses that after such analysis, appropriate changes in the supply chain itself will capture the savings by changing “existing supply chains and processes. The fundamental redesign of cost drivers has repeatedly unlocked savings in the range of 10-30 percent for leading organizations.”

The resulting relationship strategy depends on formalizing and managing key suppliers. These changes will typically require modification to or creation of key supply agreements that appropriately capture the Supplier Relationship Management results, and provide flexibility for future adjustments. Hence the reason legal counsel must be sensitive to and knowledgably of Supply Chain Management issues and concepts.

- - Greg Chabon

Greg Chabon quoted in Triad Business Journal SCM article

2009-11-09T11:20:00.000-05:00

The Triad Business Journal turned to Womble Carlyle’s Greg Chabon for insight when putting together a major article on supply chain management. The article, “The missing link: Firms need to get to know their supply chain,” is written by staff reporter Michelle Cater Rash and appears in the Oct. 30-Nov. 5th edition of the newspaper.

Greg offers his thoughts on how companies can better understand supply chain management and control costs in this area. To get started, he suggests companies map out their supply chain to determine where money is being spent and where risks occur.

“It’s like your personal budget at home,” he tells the newspaper. “You need to look at everything you spend and where you spend it to see how you can control your costs.”

Rockslide closes I-40, creates supply chain headaches for truckers

2009-11-02T15:55:00.002-05:00

Early on the morning of October 26th, a rockslide closed a part of Interstate 40 in western North Carolina. The highway is one of the state's key trucking routes, and one of the chief roads used by tourists and others traveling to the Blue Ridge Mountains, Tennessee and beyond.

According to experts in the trucking industry, the I-40 road closure will require truckers going both east and west to travel an extra 100 miles to detour around the rockslide. Depending upon their tariffs, it could cost an extra $125 to $200 each way. Typical daily truck volume through this section of I-40 is 12,000 to 15,000. That’s $3 million per day. The section is estimated to be closed for up to three months. That adds up to $270 million in extra freight costs, and right in the middle of the holiday season.

This unpredictable natural disaster underscores the need for continual review of your supply chain, and having recovery plans in place and multiple sources of supply and transport available.

- Greg Chabon

Supply, Demand and Finance - Managing Supply Chains in Uncertain Times

2009-09-09T10:47:00.002-04:00

Supply chain management originated as means of fostering growth by making businesses leaner, more efficient and more responsive. But in the ongoing economic downturn, the old adage of “A chain is only as strong as its weakest link” has proven to be true about supply chains as well.

For many businesses, the difficulties are manifesting themselves at the end of the chain, as customer orders plummet. But economic problems at the front end of the supply chain also have created difficulties—for example, Best Buy recently noted that they could have sold more electronics in the first quarter, but suppliers were unable to provide the goods. Companies in the middle of the chain find themselves getting pinched at both ends.

As a result, risk assessment and risk management now must extend beyond a company’s own boundaries to include suppliers, distributors, creditors, customers and other business partners. Contributing editor Russ Banham addresses these risks, and how to address them, in an excellent article in CFO Magazine.

Banham found that companies now must perform much more intensive due diligence on assessing the financial security of their suppliers. Some businesses, such as Corning, are using the same methods that they previously have used to scrutinize customers to vet suppliers.

“We also talk to the suppliers’ suppliers,” Michael Kramer, CEO of Kellwood Co., is quoted as saying in the article. “We'll ask them flat out, ‘Are you getting paid?’ If they're not, it could be an indication that their customer — our supplier — has financial problems.”

Some companies are turning to outside consultants, such as the Insight Sourcing Group, for help in consolidating their vendor base, rationalizing SKUs and otherwise keeping their supply chains lean and functional. Insight is compensated based on the savings they generate for their clients, and they have a track record of success in reducing costs and improving EBITDA (earnings before interest, taxes, depreciation, and amortization).

- Jackie Camp

Global competition for the U.S. dollar?

2009-07-02T14:50:00.004-04:00

The state-run China Daily reported two stories last week suggesting that the U.S. dollar may not be the touchstone of global trade, and that other currencies, such as the renminbi (or yuan), the official currency of the People’s Republic of China, will ascend in global importance. These stories underscore an obvious concern that sourcing prices in China will only continue to escalate in the short term. From a longer term perspective, these stories also highlight the need for vigilance in monitoring developments impacting supply chains and the contracts which define and control them.

The first story of interest was published on Thursday, May 21, when China Daily quoted Brazil’s President, Luiz Inacio Lula da Silva (while visiting the PRC) as calling for China and Brazil to trade in their own currencies and put an end to trade based on the U.S. dollar. In calling for finance ministers of the two countries to begin discussions on the matter, the Brazillian leader noted trade costs between the nations would be reduced by the elimination of fees to exchange currency into US dollars as an intermediate step to payment. Brazil already has agreements with other trading partner nations calling for trade in local currencies.

And on Friday, May 22, China Daily ran a piece predicting a greater global role for the yuan on account of China’s growing role in the global financial economy. Perhaps just as telling, in a manner casting China in the role of Queen Getrude to the world’s Hamlet, is the level of attention China continues to place on protesting (methinks too much) that it has not engaged in currency manipulation as a means to favor its own exporting industries. Consider, for example, the great pains taken to get out news, perhaps overlooked by the rest of the world, to the effect that the Obama administration (speaking through Treasury Secretary Geithner) does not view China as having manipulated the currency exchange rate for export advantage.

The emergence of such arrangements as called for by Brazil, and the push of the Chinese to elevate the global status of its own currency, could mark the beginning of a major trading shift away from U.S. dollar denominated transactions. Setting aside the likelihood of this actually coming to pass (perhaps not as far-fetched a notion as it was a year or so ago), or the time frame within which such a change would evolve, there are serious business risks and opportunities here, and some legal issues to keep in mind.

Consider, for example, all of the standing agreements in a typical global supply chain which base all of the interdependent transactions flowing through the chain on U.S. dollar demoninated pricing. Many of these agreements may be long term in nature, and while some may have termination provisions based on the convenience of a party or termination for cause under specified circumstances, major changes of this nature may likely not give a party who begins to suffer a competitive disadvantage on account of currency a right under current contracts to terminate for good cause. At best, most existing agreements would typically include a so-called “force majeure” (or temporary change in conditions) clause which would allow suspension of performance during the pendency of a currency crisis, but even then the right to terminate based on such an event is usually limited or non-existent in most iterations of this clause.

Therefore, closer attention to currency issues should be at the top of the list of external factors every supply chain manager should monitor, if not already at or near the top of the list given the current volatility in the world economy. While this truly would be a longer-term trend, if it does become a trend, currency provisions should also top the list of items for which to periodically reassess contracts, particularly as contracts are renewed or entered into during the ordinary course of business.

- Randy Hanson

Protecting accounts receivable for inventory sold under the UCC

2009-07-01T10:13:00.002-04:00

In the current economic climate, sellers are increasingly seeing their sales on credit for what they are - a gamble on the buyer’s creditworthiness. If the buyer doesn’t pay its invoice, what rights does the seller have against the buyer? How do the seller’s rights compare to those of competing creditors? If there’s not enough money to pay everyone, does seller still get paid?

The Uniform Commercial Code (UCC) dictates the answers to these questions and the answer frequently depends on what steps the seller has or has not taken BEFORE the sale to protect its interests.

The UCC gives special treatment to sales of consumer goods. If the buyer is the end user of the product (the consumer), will not be reselling the product and is using it primarily for personal, family or household purposes, then a seller whose agreement with the buyer on credit (the store credit card agreement, for example) provides for a security interest in goods sold but not yet paid for, obtains an automatically perfected priority lien on the sold merchandise. No steps are required for perfection and seller’s claim to the merchandise will generally trump those of other creditors.

If, however, the goods sold constitute “inventory” in the hands of the buyer, meaning generally that they will be reselling them or will be using them in their business, then perfection is no longer automatic and affirmative steps must be taken to protect a seller’s rights if the buyer fails to pay for the goods purchased.

First, you need to be certain that your sale documents (e.g. purchase orders) contain effective language granting you a security interest in the items sold until such items are paid in full. In UCC terms this effects the “grant” of your security interest and gives you rights in the items sold as against your buyer/debtor. This does not, however, confer “perfection” of the security interest, which determines your priority among competing creditors.

In many if not most cases, you will likely be selling your products to a buyer who already has some form of general corporate financing in place, which financing is typically secured by a “blanket” lien on all assets of the debtor. That means that once you sell your products to buyer/debtor, buyer’s bank will get a lien in those assets in addition to yours. So whose lien comes first?

The answer under the UCC is that the bank’s lien on inventory will trump or prime your lien on your products sold to buyer unless you (1) file a UCC financing statement against the buyer with respect to your products sold BEFORE you sell the products to them AND (2) notify the competing bank creditor of your impending lien BEFORE you sell the products. These steps will allow your lien in products sold by you to your buyer to prime the bank or other inventory lender’s lien.

The burden of both filing the UCC and providing prior notice to an inventory lender before making a sale, as a practical matter, dictates that most sellers will pick and choose which sales and which buyers warrant this level of protection. In most cases, you, as seller, will not know if your buyer has an inventory lender or the identity of that lender, so a UCC search will need to be conducted first, an additional administrative burden. Nevertheless, for large sales and/or for buyers whose creditworthiness may be suspect (a growing group of buyers in these troubled economic times), extra diligence and action may be warranted.

- Jackie Camp

International Outsourcing - What Happens After Satyam?

2009-04-15T14:28:00.003-04:00

This month Xerox announce a data center outsourcing deal worth more than $100 Million over six years with huge Indian service provider HCL Technologies. Under this deal, HCL will manage Xerox’s disaster-recovery preparation and consolidate Xerox's data centers in North America and Europe. As American and European companies continue to seek the cost savings of offshoring their vital business processes, the recently admitted mega-fraud announced at Satyam Computer Services Ltd. does not seem to affect their risk tolerance.

Most executives would agree that running data centers and managing disaster recovery would be important jobs to trust to an outside offshore company, and a hundred million dollars worth of service should be seen as financially significant. So how does a company like Xerox mitigate those risks and justify its decisions to the SEC? Certainly, conducting financial audits and SAS 70 audits can help, but it is likely that Satyam had passed those same tests. The same is true for operational risks and data security risk. There is no substitute for putting shoes on the ground with the prospective outsourcing vendors, sending in trusted examiners to review the books, interview the workers and manually inspect the operations.

Most companies looking to outsource important business processes are seeking trusted partners to integrate into corporate functions. In the Satyam debacle, State Farm chose to terminate its relationship after the trust disappeared, while GE continued with their contract. But should the Satyam disaster bring greater scrutiny to all outsourcing vendors, and if so, how do client companies force higher standards of review into their agreements? Simply calling for audits and reviews that were not negotiated into the original contract is usually not well received by the vendor in these intricate relationships

Alternatively, a customer company could terminate the agreement for cause, if possible, and then renegotiate. Such brinksmanship contains its own dangers, especially in fields where trust is crucial. Gartner predicts that the costs of offshore outsourcing are likely to fall between 5% and 20% over the next two years, in part because of contract renegotiation efforts. Companies wary of another Satyam could apply their newfound negotiating leverage to reduce costs, to build more accountability into the agreement, or both. Pushing for the lowest possible outsourcing prices can be counterproductive to managing the relationship risks.

US companies in major business process outsourcing arrangements should be looking at their contract termination provisions. Since most parties do not anticipate spectacular financial fraud as part of the relationship, it is seldom well addressed in the contract. In other words, an outsourcing customer rarely builds into its agreement the specific right to terminate the agreement or to punish the outsourcing provider where the provider’s underlying financials were built on lies. Instead, a North American customer of such services will have to either: 1) pay a termination fee if it wishes to terminate for convenience in this case, or 2) find a way to fit the provider’s crime into a general trigger for a “termination for cause” in the Agreement.

The customer can hope that a financial fraud leads to a different kind of contract violation that can allow termination for cause. For example, the Satyam fraud led to a sale of the entire entity, so Satyam customers who had built “no assignment/no transfer” terms into their contracts may have a way of changing providers without paying termination fees. Those outsourcing customers without such luck will have to rely on the fraud to lead to a violation of the outsource providers service levels, or for the fraud to trigger a more general term of default in the agreement, such as capitalization requirement (rare in these agreements), a general requirement of honesty and fair dealing, or a warranty or condition precedent that the outsource provider’s pre-contract representations about itself were truthful.

Will the Satyam fraud impact risk mitigation requirements imposed by Sarbanes-Oxley or by industry regulations? It is too early to understand how the admitted fraud will drive U. S. regulators to tighten risk requirements, especially in the current political mood that favors increased regulations on corporate operations. However, regulated or not, companies looking to outsource business processes are now on notice that even the largest and most apparently solid of outsourcing vendors must be carefully checked in all operational and financial aspects, and appropriately monitored through contract.

-- Ted Claypoole

Restaurant chain creates supply co-op

2009-02-27T11:10:00.003-05:00

The principles of supply chain management don't just work in the manufacturing sector. The restaurant industry also is putting them to good use.

This month, DineEquity, Inc., the parent company of Applebee's and IHOP, announced that it is forming Centralized Supply Chain Services, LLC, a purchasing co-op which will purchase supplies for nearly 3,400 restaurants.

The goal is to streamline operations and leverage the restaurants' buying power. And when you buy 100 million pounds of chicken and nearly six million gallons of soda each year, as Applebee's and IHOP do, that creates substantial savings. The co-op is expected to save restaurant owners 3 to 5 percent on their purchases of food and other commodities.

Let it SNOW - New program aims to improve supply chain efficiencies and reduce pollution

2009-02-02T16:09:00.002-05:00

IBM announced a new consulting program offering to help companies improve not only the efficiency of their supply chains, but also their carbon footprint. The program aims to help companies reduce carbon dioxide emissions, fuel usage and costs by providing a detailed analysis of their supply chain logistics and suggesting improvements. IBM says “the Supply Chain Network Optimization Workbench – or SNOW – uses advanced mathematics to provide a smarter, deeper understanding of overall supply chain logistics. This allows clients to optimize decisions for cost, service levels and lower CO2 emissions.”

So not only are competitive forces making supply chain management an imperative, but environmental forces are contributing as well. Making a supply chain more robust, leaner and more cost-efficient are clear objectives in any supply chain improvement plan, but IBM adds environmental impact to the list.

Under President Obama’s New Energy For America plan, a carbon credit cap-and-trade plan will be implemented to establish an annual (and declining) national aggregate cap on carbon emissions. This cap will be divided up among companies in individual allowances. The companies are then free to buy and sell allowances in order to continue operating in the most profitable manner available to them. Those that are able to reduce pollution at a low cost can sell their extra allowances to companies facing high costs. Now, in addition to adding value to a company’s overall competitive position, an efficient supply chain may credit “bottom line” value by allowing a company to sell carbon credits.

As companies continue to review and improve their supply chains in 2009 and beyond, the “carbon footprint” may become another important criterion in the mix. In addition, your customers may begin to require a shrinking “footprint” under supply agreements, and buyers may want to consider adding these competitive factors to their agreements as well.

-- Greg Chabon

Country of Origin Determinations: Where Your Supply Chain Begins Matters to the U.S. Government

2009-01-20T13:01:00.000-05:00

A number of U.S. Government agencies apply different and sometimes conflicting rules to determine where a company sources products. So-called “country of origin” determinations – an every day reality for businesses whose supply chain includes foreign-sourced supplies – are rife with potential traps for the unwary.

U.S. Customs and Border Protection (“Customs”) requires imported articles of foreign origin to be marked in a conspicuous place to indicate the country of origin of the article. Also, Customs enforces duty assessments on imported articles that are determined by the country of origin of the articles. Customs’ country of origin determinations generally focus on where the product has been “substantially transformed” into a new and different article of commerce with a name, character or use distinct from that of the article(s) from which it was transformed. The Federal Trade Commission (“FTC”) also makes country of origin determinations of sorts when it enforces regulations prohibiting unfair or deceptive claims that a product is “Made in the USA.” Finally, federal agencies buying products must rely on country of origin determinations under the Buy American Act (“BAA”) and the Trade Agreements Act (“TAA”). Under the BAA, suppliers may only sell “domestic end products” to the U.S. Government, i.e. products deemed to be manufactured in the U.S. because the cost of their components mined, produced, or manufactured in the U.S. exceeds 50% of the cost of all components. The TAA, where it applies, allows the U.S. Government to buy either “U.S.-made” end products or products from certain designated, Caribbean Basin or NAFTA countries. Qualifying products under the TAA are either mined, produced or manufactured in the U.S. or an eligible country, or have been “substantially transformed” in the U.S. or an eligible country.

The upshot of these multiple regulatory regimes, not surprisingly, can be results which are unpredictable and confusing. For example, finished product that need not be marked under Customs rules because it is not deemed to have originated in a foreign country, may nonetheless not be deemed to be eligible to be labeled as “Made in the USA” under FTC rules. Likewise, finished product that must be marked with a foreign country of origin under Customs’ rules, and can not be labeled as “Made in the USA” under FTC rules, may still be eligible for sale to the U.S. Government under the BAA or TAA.

Thus, supply chain risk management should include processes for tracking country of origin of components and final products. In addition to civil or criminal penalties, violations under Customs, FTC, and procuring agency rules can cause substantial supply chain disruption if mis-marked products are impounded at ports of entry.

As complicated as current “country of origin” rules are, the regulatory landscape may grow even more complex. Customs has proposed revisions to its “country of origin” rules to replace current reliance on “substantial transformation” with the “tariff-shift” test employed for NAFTA country of origin determinations. Stay tuned.

-- Jim Kearney

Supply chains as strategic defense tool

2009-01-12T15:02:00.000-05:00

Supply Chains as a strategic defense initiative? A recent NY Times article explicitly addressed the importance of supply chains as a strategic defense tool. In it’s article describing a secret request to the U.S. by Israel last year for bunker-busting bombs it wanted for an attack on Iran’s main nuclear complex, the NY Times discussed a new covert U.S. action intended to sabotage Iran’s suspected effort to develop nuclear weapons. The covert operation, started in early 2008, includes renewed American efforts to penetrate Iran’s nuclear supply chain abroad. It is aimed at delaying the day that Iran can produce the weapons-grade fuel and designs it needs to produce a workable nuclear weapon.

This small mention of the Iranian nuclear supply chain indicates that global supply chains are a fact of every project (good and bad), and that supply chain disruptions have such dramatic impact on operations that they can serve strategic defense objectives, and serve as a possible alternative to direct military action.

This underscores the importance of considering your overall supply chain, identifying the weak points, and understanding what a disruption would mean to your ability to continue operations. Pre-planning for a supply chain disruption is no longer optional – particularly in the current global economic crisis. Supply agreements should address disruption planning, and procurement/supply chain management teams need to ensure workable contingency plans are ready to go.

-- Greg Chabon

Piedmont Triad becoming supply chain hub

2008-12-08T14:48:00.001-05:00

According to a new study, North Carolina’s Piedmont Triad ranks 33rd in the nation for transportation and logistics.

That may sound like a modest accomplishment, but given the size of the market, it is encouraging news. The Greensboro/Winston-Salem/High Point region has more than 14,000 jobs in trucking, support for air transportation and warehousing, according to the report’s author, UNC-Greensboro professor Keith Debbage. Those jobs pay an average of $38,000 per year, the report found.

What’s more, the Piedmont Triad is poised to move into the nation’s top 25 supply chain markets in the years to come, particularly with FedEx opening a major hub at Piedmont Triad International Airport next year.

Economic development leaders in the Piedmont Triad have made supply chain management a focal point, as the region already has a strong base of highways, railroads and airports upon which to build. Many in the area are looking at logistics and transportation to replace the old-line manufacturing jobs that have disappeared in the region during the past two decades.

Outsourcing of legal services

2008-12-03T09:37:00.003-05:00

A recent Wall Street Journal article suggested that “as the economic crisis deepens in the U.S., some lawyers are making out well -- in India.” The article suggests that as U.S. companies seek ways to reduce costs in light of the now-official U.S. recession, the legal spend is coming under increased pressure. “Routine legal work” like research, due diligence and document review is being done in India at “roughly half the cost as in the U.S.,” outsourcing companies say.

No doubt every aspect of a company’s operations are coming under intense pressure to cut costs, and the “legal spend” is no exception (and some say it’s long overdue).

Outsourcing and offshoring business processes is nothing new, and offshoring legal work has been around a good while now. The jury is still out on how pervasive outsourcing legal work will be in the U.S. Increasing wages in India and elsewhere will continue to chip away at the labor price advantage, just as they have in China, Korea, and Vietnam, and if the ink being spilled about U.S. law firms seeking new and innovative pricing structures turns into action, the cost benefits of offshoring legal works will shrink further.

Like all offshoring decisions, companies are well advised to evaluate the total cost of offshoring any operation, and particularly legal work, not just the hourly rate differences. Can the offshore product being used without additional supervision by U.S. lawyers? Do you need to advise clients that you’ve used offshore legal help, and what will their reaction be? What liabilities are faced (and what protections are available) when confidential client information is sent offshore? Is the attorney-client privilege maintained?

Law is a licensed profession in the U.S., and that means there are numerous regulations on the practice of law imposed by each state in the U.S. This creates greater complexity, and the need for greater diligence, in making the decision to offshore legal work. Several state bars have issued opinions on how a U.S. lawyer may utilize offshore legal work, including the risks and obligations of supervision by U.S. licensed attorneys and disclosure requirements to clients.

For some information on these hurdles for U.S. lawyers looking to offshore legal work, check out this article we prepared, with the assistance of Tiffani Otey, one of our summer associates.

-- Greg Chabon

New article spotlights role of risk management in supply chain matters

2008-11-18T14:53:00.002-05:00

Most people would agree that risk management is a vital component to successful supply chain management. However, a recent survey of supply chain manager found that none rated their current risk management system as "highly effective." Only 35 percent rated their risk program as "moderately effective," meaning that more than two-thirds of surveyed companies find themselves without a sufficient plan to meet unexpected contingencies.

The current issue of Shipping Digest has an excellent article on the role of risk management in protecting supply chains.

The article spotlights the excellent response Cisco Systems had to a massive earthquake in China earlier this year. Cisco has made risk management a point of emphasis and that diligence paid off during the earthquake.

Risk mitigation often makes company leaders cringe. After all, it is an "all expense/no return" investment. Unless, of course, you happen to need it - at which point it becomes invaluable.

In addition to working directly with your vendors and customers to coordinate disaster recovery planning, supply agreements need to reflect this planning and implement risk mitigation techniques on a consistent basis. Too often, a company has hundreds of different agreement so that when a disaster hits, management must spend far too much time just figuring out what each vendor or customer agreement requires, rather than focusing on risk mitigation.

After reading this article, prudent supply chain managers will undoubtedly be inspired to collaborate with their internal and external risk management professionals to examine potential legal, accounting and insurance risks. A risk assessment audit with experienced supply chain professionals can help you identify and correct areas of weakness before they become a problem.

Challenges facing the trucking industry.

2008-11-03T16:39:00.004-05:00

A recent report published by the American Transportation Research Institute (ATRI) says that the trucking industry puts the state of the economy near the top of the challenges it faces. Not surprising. It is second only to fuel costs, which takes the top spot in the top ten challenges the trucking industry says it is facing.

Here's the top ten list:

1. Fuel costs
2. Economy
3. Driver Shortage/Retention
4. Government Regulation
5. Hours-of-Service
6. Congestion
7. Tolls/Highway Funding
8. Environmental Issues
9. Tort Reform
10. Onboard Truck Technology

The information from which the report was compiled had to have been gathered before the economy took its nose dive in September and October. By now, it wouldn’t be surprising if "the economy" dwarfed all the other challenges listed in the top ten.

To read observations from the report on each of the above topics, click here.

-- Karen Carey

Boilerplate clauses can be more trick than treat

2008-10-29T10:14:00.003-04:00

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

2008-10-08T16:07:00.003-04:00

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

2008-10-07T09:20:00.002-04:00

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

New product packaging limits proposed in China

2008-09-30T15:23:00.003-04:00

The China Daily newspaper recently reported that the government has proposed a new rule to limit the amount of packaging used in goods produced or sold in the country.

The rule would likewise ban goods which occupy less than forty-five percent of the space of a product container. The proposed limit was recently announced jointly by the General Administration of Quality Supervision, Inspection and Quarantine and the National Development and Reform Commission (the “NCRC”). The NCRC is the management agency under the Chinese government's State Council which formulates economic policy through rulemaking proposals. If adopted as passed, the rule would also impose record-keeping requirements on all product packagers. The rule still awaits approval by the State Council.

While the move is consistent with efforts of the central government to promote more environmentally sound policies, it can also been seen as the continuation of a general trend of increased regulation by the central government on manufacturing businesses (with a corresponding rising cost of legal compliance for operations in China). As China Daily also reported, opposition from manufacturers already has surfaced to the “one size fits all” rule. Critics fear the proposal may impact some manufacturers disproportionately, like pharmaceutical producers whose products necessarily require more fill materials relative to total quantity or volume of product packaging. Input on the proposed rule is still possible.

For more information, contact a member of Womble Carlyle’s Supply Chain Management or China practice teams.

-- Randy Hanson

Good article on UCC and U.S. contracts

2008-09-26T14:49:00.005-04:00

Supply chain managers and legal practitioners alike are surely mindful that the sale of goods is at the heart of every product or parts supply agreement. Such sales are governed in the U.S. not only by the parties' agreement (and perhaps industry custom and practice), but also by the Uniform Commercial Code (UCC) as adopted by each state.

The UCC has various rules that govern the relationship between buyers and sellers of goods, covering things such as contract formation and product delivery and acceptance requirements. Some of these rules are immutable, while others serve on an as-needed basis to fill any gaps in the parties' agreement. Most typically, I suspect that the UCC plays at best an unseen role in day-to-day supply negotiations. Hopefully, most parties (or their counsel) have a general grasp of the relevant UCC rules and are at least aware of potential pitfalls. Some of those issues are fair game for a future blog entry, but even UCC experts will want to take note of the article cited below.

Assume that one party to a supply arrangement is U.S.-based and the other is foreign. After some initial posturing, the U.S. buyer is feeling pretty good that the foreign seller is amenable to picking a U.S. jurisdiction, such as New York or Delaware, for the choice of law. The U.S. party may conclude (with relief) that the international legal issues are put to rest. Good call? Well, your opinion may change after reading this recent article.

Business Law Today recently featured an interesting - and somewhat surprising - analysis on the United Nations Convention on Contracts for the International Sale of Goods. It's worthwhile reading, particularly regarding how the Convention on Contracts relates to U.S. contracts.

The Convention on Contracts is the uniform international sales law governing a large percentage of worldwide trade. More than 70 nations, including the United States, have ratified the Convention.

-- Heather Mallard

Welcome to the Womble Carlyle Supply Chain Blog

2008-09-11T15:02:00.003-04:00

Welcome to the Womble Carlyle Supply Chain Blog. A long time coming, this blog will capture the thoughts of our firm's Supply Chain Management team. What’s a law firm doing talking about Supply Chain Management, you ask? Is this about how the law firm buys paper, toner cartridges, and file folders?

Nope. This is about how we are adapting the practice of law to focus on, assist with, and understand how the law and outside counsel can improve our clients' supply chains, customer/vendor relationships, and be a better teammate in the quest for improved, strengthened, more reliable, and more robust supply chains. The Supply Chain is the culmination of people, contracts, processes, information, transportation and events that get the right things to the right places at the right times, generally for profit. Key areas of Supply Chain Management include contract and commitment management; global logistics, such as distribution, warehousing and joint ventures; import/export issues, including security and legal compliance; and physical and data security, as well as risk management.

The lawyer’s role should be to facilitate and improve the supply chain. This is not "new law," but a new way of considering and integrating legal issues within an overall strategy.

Our clients make up some of the biggest names in manufacturing, distribution, research, transportation, logistics, sales and service. Supply Chain Management is a critical component of their profitability, as it is for virtually any company. It is imperative, then, that all components of the business – finance, operations, procurement, legal – understand the Supply Chain and how their specific roles enhance the chain.

With assistance from renowned experts in the field like N.C. State University's Dr. Robert Handfield, we developed an approach that seeks to integrate our legal expertise to focus on Supply Chain Management problems – rather than approaching these issues in traditional legal "silos."

Our internal research yielded some obvious and not-so-obvious results:

Supply Chain and Supply Chain Management are different at each company - One size does not fit all. Variables include the nature of products, types of customers, number and location of vendors and manufacturing processes.

There are some legal risks in lean supply chains, including:
A lack of supply agreements with key vendors; differing contractual terms among vendors
information management shortcomings, particularly in the areas of forecasting and electronic data interchange; and inadequate disaster recovery planning

Does Supply Chain reliability really matter? Well, according to Georgia Tech researcher Dr. Vinod Singhal, companies experiencing supply chain disruption experienced:
7% loss in shareholder value every day of disruption
33 to 40% lower stock returns over a 3-year period pre- and post-disruption
13.5% increase in stock price volatility
43% median drop in operating income
32% median drop in return on sales
35% median drop in return on assets
11% growth in costs
Businesses have recognized the value of supply chain efficiency for some time. But the traditional structure of law firms doesn’t necessarily mesh with this new way of doing business. As lawyers, we must view our work as a piece of the whole, not as an isolated function. Furthermore, we must gauge how our work will impact our client’s overall operation. Above all, building relationships is vital in today’s global economy; it is more important than contracts. Lawyers must realize this reality and become facilitators in business relationships.

We invite to you to check back with us—we anticipate to update this blog at least monthly, and usually more frequently. We also invite you to take a look at our Supply Chain Management team site.

-- Greg Chabon