What lawyers can teach you about supply chain

By | January 25, 2014

To get a product or service to market, it often passes through dozens countries, factories, airports, trains, ships, and hands.  For anyone who read The World is Flat (2005) by Thomas Friedman, it’s a foregone conclusion that globalization and international trade are here to stay. This weekend, I went to the grocery store with my wife, and we got persimmons from Israel and grapes from Chile in the same aisle.

Supply chain is about relationships. Relationships among suppliers, manufacturers, distributors, governments and customers. Relationships that are more complicated, further removed, and increasingly risky. As those physical and contractual linkages expand father from corporate headquarters into less-developed markets, companies are exposed to more volatility. In the example below, the company has a supply chain that spans multiple countries and partners.  It’s a complex world. 

Supply Chain Example

How to mitigate that risk? The professionals best able to describe, advise and protect against supply chain risk are not consultants, but lawyers. Think about it. There are a dozen different types of risk: political, economic, currency, supplier insolvency, bribery, corruption, counterfeits, gray market diversion, and weather to name a few.

It’s contracts and relationships that keep trade flowing. Billions of dollars of good, services, and money trade hands daily because there are rules: commonly accepted practices, protocols, contracts, and the enforcement of law.  

Consultants need to find answers anywhere. As lateral thinkers, consultants need to be willing, humble, and eager enough to look for answers anywhere. On the front page of Baker & McKenzie’s website, you see a free pdf download entitled: The Companies You Keep: Global Supply Chain Management: Five Steps to Managing Third-Party Risk. If you are a supply chain consultant, read it. They know their stuff.

Who is Baker & McKenzie? This is one of the largest global law firms and a name worth remembering. They are 4,000+ lawyers strong and $2.4 billion in fee income in the most recent fiscal year, up 5% YoY.  Net profits were $862 million, and profit per equity partner was up 10% YoY to $1.2 million on average each. Excellent year for the firm all around. See details here.

5 Areas of Focus: Like a good consultant would, Baker & McKenzie break their report into clearly defined pieces which makes it easy to read and reference:

  1. Vetting and selecting
  2. Structuring and documenting
  3. Training and education
  4. Monitoring and evaluating
  5. Reacting and remedying

They hired a consultancy to survey 100 executives and they uncovered a wealth of street-smart advice that anyone in procurement, export/import, or international markets should pay attention to. In fact, much of these best practices apply to any supplier-customer relationship, regardless of the geographic scope or scale. Reading through the recommendations it is a good blend of supply chain, legal, and business advice.

The top three risks listed by geography.  Click through the graphic to get to report.

Baker McKenzie Supply Chain

The bullet are a sample from the Baker & McKenzie report.  My comments are in blue.

  • “Use your RFP process to secure commitments from suppliers/partners that address your greatest legal risks while the process is still competitive.”  Think ahead and put your risk-related concerns on the table early in the negotiations and the relationship.  During the RFP process, all vendors want your business, and will be eager to satisfy your requirements (especially if they perceive it to be unrelated to pricing)
  • “Check references and conduct in-person interviews with key partners in high-risk jurisdictions, particularly in less transparent markets.” This advice applies to any procurement that is strategic, high-risk or potential point of failure.
  • “Develop a checklist of legal and risk-related questions for your procurement officers.”  Collaboration between the legal department and supply chain is critical, and yet often ignored for more “pressing” problems.
  • “Work backwards.” All supplier, distributor relationships are not of the same importance or risk.  Create a 2 x 2 matrix, evaluating the potential impact vs. risk.  Prioritize those with the biggest impact and highest risk. 
  • “Keep your contracts current.”  Obvious, but many Fortune 500 do this poorly.
  • “Take a step back and look for patterns.” Incredibly deep and strategic point.  Find the trends and “white spaces” which the current legal and supply chain processes are not catching.  What is falling through the cracks?  If these trends continue, what does that imply?  How can we get ahead of the issues?
  • “Include breach notice provisions and check to make sure the third-party supplier/provider can pay the liability limit if a breach occurs.” This is the kind of detail that management consultants might miss.  Does the supplier have the ability to pay future damages and does the contract have the “breach notice provisions” to enforce the compensation?
  • “Consider using local law or similar laws to govern your contract in markets where.” This was a key point made throughout the report.  Think local. 
  • “Consider using outside counsel for third-party audits.”  While this certainly makes sense, it is also a good idea to hire Baker & McKenzie for the work. . . 
  • “Use that information to revise your contracts, protocols and processes to keep the problem from reoccurring.” As a consultant who firmly believes in continuous improvement, this hit home.  Get better.  Don’t repeat the same mistake twice.   Refine the supply chain process so it protects you.

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