By Friday, October 4, 2024, the International Longshoremen’s Association agreed to suspend their strike at the US’ East and Gulf Coast ports and extend their previous contract to January 15th based on the maritime alliance’s raise proposal, to allow for negotiation of the remaining details of the new contract. However, we have all learned from COVID-19 supply chain pressures that despite the suspension and prospective resolution of the port strike, unforeseen issues can arise materially affecting many US manufacturers’ supply chains.

From geopolitical tensions to the impacts of climate change, manufacturers today face numerous risks that could significantly disrupt supply chains, increase costs, create out-of-stock problems at retail and on ecommerce, and ultimately cause business shutdowns. Proactively managing these risks is essential for ensuring operational continuity. Manufacturers and companies dependent upon other supply, should consider diversifying supply sources and adjusting production strategies, staying well-informed of emerging risks, and implementing a critical layer of protection in negotiating certain strongly protective contractual provisions with their supplier. This article explores issues that could impact US manufacturing supply chains, risk mitigation and awareness, and protective contractual provisions to help reduce exposure, liability, and business continuity when these unforeseen events occur.

1. Geopolitical Tensions and Trade Restrictions

The ongoing tensions between the US and China highlight the risks associated with depending heavily on suppliers from politically volatile regions. Escalating tariffs, sanctions, or outright trade bans could cripple manufacturers that rely on imports of raw materials and components from these markets. Industries such as electronics and automotive, which depend heavily on China for rare earth elements and microchips, are particularly vulnerable.

Mitigating the Risk:

Manufacturers can protect themselves from trade disruptions by negotiating contractual provisions that:

  • Force Majeure Clauses: These clauses should specifically address risks tied to geopolitical events like sanctions, tariffs, or government-imposed export restrictions. By including these terms, manufacturers can suspend contractual obligations without penalty if their supply chain is impacted by geopolitical actions.
  • Price Adjustment Clauses: Manufacturers can negotiate terms allowing them to renegotiate prices if tariffs or duties are imposed that affect the cost of materials.
  • Liability Provisions: Ensure the supplier is liable for meeting supply deadlines, regardless of the geopolitical situation, unless a clearly defined force majeure event occurs.

These provisions allow manufacturers to either renegotiate terms, source alternative suppliers without incurring penalties, or suspend their performance obligations temporarily without legal ramifications.

Staying Informed:

Regularly checking updates from sources like the US Department of Commerce's International Trade Administration helps manufacturers stay ahead of potential trade risks and adjust supply contracts accordingly.

2. Extreme Weather Events and Climate Change

Climate change is driving increasingly frequent and severe weather events, such as hurricanes, floods, and wildfires, which can severely disrupt supply chains. For instance, hurricanes in the Gulf Coast have previously disrupted operations for industries reliant on petrochemical products.

Mitigating the Risk:

Manufacturers can address these risks through:

  • Business Continuity and Disaster Recovery Provisions: Include terms requiring suppliers to have business continuity plans in place and. Entering into a supply contract might be contingent upon the company’s review of supplier’s business continuity plans; therefore, do the due diligence of reviewing supplier’s business continuity plan and require that supplier submit any updates, as applicable. The company’s protection might lie in supplier’s obligation to include alternative production facilities in less disaster-prone areas, and inclusion in the contract for the company to have priority access to available goods post-disaster.
  • Force Majeure Clauses: Explicitly include natural disasters, extreme weather events, and other climate-driven disruptions as covered events to protect the company from penalties or liabilities if such occurrences prevent performance. This provision allows for the suspension or renegotiation of obligations during a disaster, mandates proactive mitigation efforts from suppliers, and provides termination rights if disruptions persist.
  • Penalty Clauses for Non-Performance: Ensure that suppliers who fail to deliver agreed-upon quantities of semiconductors face financial penalties. This incentivizes suppliers to prioritize your orders.
  • Escalation Clauses: These clauses allow manufacturers to quickly escalate sourcing to alternative suppliers when a critical shortage occurs.
  • Long-Term Contracts: Negotiate long-term supply contracts with priority access or exclusive supplier commitments to ensure the allocation of scarce materials.
  • Insurance Clauses: Require suppliers to carry sufficient insurance (e.g., business interruption insurance or natural disaster coverage) to cover losses caused by extreme weather events. Manufacturers should also secure their own business interruption insurance.
  • Contingency Contracts with Backup Suppliers: Manufacturers can negotiate contracts with secondary suppliers to be activated if a primary supplier's operations are disrupted by extreme weather.

These provisions help ensure that, if extreme weather interrupts the primary supplier's ability to deliver, manufacturers will still have access to essential materials, either through backups or financial compensation.

Staying Informed:

Manufacturers and companies relying on supply of materials or product, especially those with supply from overseas, should be regularly monitoring the National Oceanic and Atmospheric Administration (NOAA) and the Federal Emergency Management Agency (FEMA) websites to track climate-related risks and adjust supply contracts and mitigation strategies accordingly.

3. Logistics and Shipping Disruptions

Global logistics disruptions, such as the port congestion seen during the pandemic, can severely delay the arrival of critical materials. Industries that rely on just-in-time (JIT) delivery models, are particularly vulnerable to such delays.

Mitigating the Risk:

Manufacturers can add the following protective clauses to their supplier contracts:

  • Late Delivery Penalties: Specify penalties for suppliers or logistics providers that fail to meet delivery deadlines.
  • Flexibility Clauses for Alternative Shipping Methods: Include provisions that allow for flexibility in delivery routes or transportation modes in case of shipping disruptions.
  • Insurance Coverage for Delays: Require suppliers to carry cargo insurance that covers losses from shipping delays, or ensure the manufacturer has its own shipping insurance.

By holding suppliers and logistics providers financially accountable for delays, manufacturers can mitigate the risks associated with shipping disruptions.

Staying Informed:

Monitor real-time logistics conditions through platforms like Journal of Commerce and Supply Chain Dive to adjust supply plans and proactively renegotiate with suppliers when necessary.

4. Energy Supply Disruptions

Energy disruptions—such as the European energy crisis of 2021—can severely impact manufacturing operations, especially in energy-intensive industries like steel, chemicals, and aluminum. Sudden shortages or price spikes can force manufacturers to curtail production or face skyrocketing operational costs.

Mitigating the Risk:

Manufacturers should consider:

  • Energy Supply Contingency Clauses: Include provisions allowing manufacturers to renegotiate energy prices or find alternative suppliers if energy costs become prohibitive.
  • Supplier Risk Sharing Agreements: Negotiate agreements that distribute the burden of rising energy costs between both the supplier and manufacturer.
  • Force Majeure Extensions: Include energy disruptions in force majeure clauses to suspend supply obligations without penalties in the event of extreme energy shortages.

These contractual provisions provide a safety net against rising energy costs or energy supply shocks, allowing manufacturers to shift operational plans or share financial burdens.

Staying Informed:

The US Energy Information Administration provides energy market forecasts and disruptions, allowing manufacturers to better anticipate price volatility and prepare for negotiations.

5. Raw Material Price Volatility

Price volatility in key raw materials like copper, lithium, and other essential components has become a persistent challenge for manufacturers. For instance, fluctuating copper prices can impact the cost of electrical equipment, while lithium price spikes can increase production costs for electric vehicles.

Mitigating the Risk:

Manufacturers can protect against price volatility by negotiating:

  • Commodity Price Escalation Clauses: These clauses adjust contract prices according to fluctuations in raw material costs, reducing the financial impact of price spikes.
  • Hedging Clauses: Manufacturers can require suppliers to hedge against raw material price volatility, ensuring stable costs for both parties. For instance, if the price of steel or oil is expected to be volatile, suppliers can hedge by securing a predetermined price through a futures contract, ensuring the cost remains stable for the term of the contract.
  • Termination Clauses: If material prices exceed an agreed-upon threshold, manufacturers may reserve the right to terminate the contract without penalties and without a lengthy lead-time/notice period.

By embedding these clauses into contracts, manufacturers can protect themselves from unpredictable price swings and ensure stable procurement costs.

Staying Informed:

Keep track of commodity price trends through the London Metal Exchange and the US Geological Survey, and adjust contracts to reflect market conditions.

The content of this post is intended to provide general information. Legal advice about specific circumstances should be sought directly from a qualified attorney.