[continued from Part 1]
It is well established that SCM remains the back – bone of every industry for its efficient functioning. Currently, the supply chain industry is in the “adaptation” stage where all players are engaged in ensuring steady flow of essential items from warehouse to designated delivery points taking into account the importance of maintaining the health and safety conditions of their workers. Global pandemics like COVID – 19 are posing as lessons to the industry on re – vamping their business practices. As the norms of “social distancing” will soon be ingrained deep into the conduct of human relations whether business or otherwise, the supply chain industry is no exception and may soon be seen to rely more on technology and invest in automated means to run their operations to meet their goal of providing seamless services to the end consumers. LSPs, in the wake of this pandemic are largely introspecting their internal processes in order to re – build a robust system of internal management.
The key long term impacts on the SCM industry may be summed up as follows:
- Re – vamping of Internal Processes: While this sector is no stranger to digitisation, the fact remains that it is still largely dependent on manual performance of operations. The present crisis is an opportunity for SCM players to evaluate and assess their systems in order to truly digitize their operations. LSPs are more likely to focus on streamlining internal logistics management in the form of installation of computerized systems for determining the loading and storage requirements of the warehouse, installation of GPS trackers on products and transport systems, adoption of digitized packaging methods resulting in digital collaboration different components within the LSP. Re – vamping of internal processes in such manner will fructify upon executing commercial contracts to source the internal processes and / or outsource the digitization of internal processes. Further, digitization of internal processes will also call upon for enhanced compliance requirements for the LSP such as for example, compliance with the Information Technology Act, 2000 and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 to maintain data security of the digital systems adopted by the LSP.
- Automation versus manual labour – who wins the race?: The traditional supply chain model is largely labour intensive in nature where procurement of man – power comprises of daily wage workers or contract labour. While a large part of LSP operations may be digitised, core activities of the LSP such as transportation and delivery cannot be replaced by digitisation especially in labour intensive economies like India. Needless to state, LSPs are already adopting contact less delivery models in times of lock – down and may continue to do so as a regular business practice. Having said that, LSPs are likely to resort to “combination hiring” such as permanent and seasonable manpower to maintain the strength of workforce at location level. Further, such combination hiring of manpower is likely to see the entering of fixed term contracts with workers, a concept which is now permitted under the Industrial Employment (Standing Orders) Act, 1946. Alternatively, LSPs are likely to carry out a complete outsourcing of some of their services sought to be performed by workers resulting in a surge of stringently worded service contracts executed with third party service providers.
- Warehouse shift: Presently, most LSPs have looked at establishing their facilities by leasing / renting warehouses typically located in the outskirts / designated economic zones / industrial parks located in every state of the country. One of the reforms likely to be adopted post the outbreak is shifting of such warehouses to locations which are clearly more accessible for storage of inventory and conducting of operations. Thus, LSPs may opt for renting warehouse space within or near the designated consumer base so as to ensure continuity and efficiency of deliveries. The demand in warehouse space on account of such reasons may cause a spike in real estate transactions in the urban areas. LSPs must be ensure that any such commercial space, if rented within city limits is in compliance with the development control regulations of the local area including applicable zonal rules made thereunder for the purpose of running commercial activities.
- Collaborations with local retailers: E – commerce companies have taken up essential service deliveries since the last three lock – downs. Such service providers engaged in essential service supplies have largely teamed up local retailers to complete deliveries to consumers. The completion of lock – down is likely to build a permanency in such collaborations due to large scale consumer interest in having door-step deliveries. The upcoming months may result in a rise of commercial contracting between such e – commerce companies and local retailers to directly source essential supplies.
- Local sourcing: One of the most significant impact brought into the supply chain industry was the stand still on sourcing of raw materials / supplies from China on account of closure of operations and imposition of lock down in the country. Business continuity has induced all industry players to look for alternative options and resorted to sourcing these raw materials at a local level. They may continue to adopt local collaborations for their sourcing requirements post lock – down period.
- Cost – efficiency: The ongoing revolution in the supply chain industry poses a bigger challenge of meeting enhanced costs associated with digitisation of operations. The question remains whether the existing supply chain players particularly the smaller players will survive the technical advancements imposed in this post – pandemic era.
Legal Repercussions on SCM
- Revisiting Obligations: Service receivers are likely to widen the gamut of representations, warranties and covenants sought from service providers under their commercial contracts. The standard clauses will now cover compliance with Government guidelines and SOPs on safety of warehouses / workplaces such as mandatory sanitisation of the premises, provision of protective equipment to workers, sanitisation of vehicles etc. along with periodical requirements to furnish relevant proof of implementation of such measures.
- Specific Indemnities: LSPs shall now be open to receiving contracts from service receivers calling upon them to take up liability upon the non – compliance of health and safety related measures to be taken by them. In sum, the LSPs will be exposed to greater accountability and enhanced financial risk under commercial contracts.
- Breach of SLAs: The activities mentioned above may also be included in the regular service levels chalked out in respect of the service provider. Non – compliance with any of these requirements may be treated as a breach of service levels followed by the service receiver and stiff penalties would be imposed and multiple violations leading to termination.
- Mandatory Inspection: In addition to the inspection rights already built in the agreements by the service receiver, the service receiver environment, health and safety policies may now mandate periodic testing and . Non – compliance or adverse findings under such audits shall result in specific indemnification liability as well for breach of quality control.
- Change in Force Majeure Clauses: The outbreak of the pandemic has caused wide-spread introspection by a lot of parties to their existing commercial contracts. They are thus revisiting the existing commercial contracts to assess the issue of suspension of business / obligations under the contract and resultant payment obligations most commonly addressed in “force majeure” clauses. Parties are now wary of the concept and aware of the importance of a comprehensive force majeure clauses which are crafted after carrying out a thorough and comprehensive analysis of the complexities likely to affect the industry and subject of contract instead of resorting to standard boilerplate clauses. Our viewpoint on drafting robust force majeure clauses is dealt here.
- Revisiting Termination: In addition to force majeure clauses (where suspension of obligations is typically followed by termination should the force majeure event continue for a longer period of time), parties may carve out specific grounds for termination entitling the party to terminate the same such as non – compliance of guidelines, SOPs and / or directives issued by the Central and State governments from time to time.
- Employer – Employee Relations: While the post COVID – 19 era has already started bringing into effect large scale layoffs and downsizing of the organisation workforce, employers are most likely to err on the side of caution where the protected class or the workman are concerned in light of several government directives and existing labour laws lending a protective hand to the workmen. However, the non – workmen category of employees may face the brunt of downsizing measures in the event they are not protected under the state wise shops and establishments legislation and also the terms of their employee contracts. Majority of managerial non – brick and mortar category of employees may see the “work from home” culture as a norm and will be subjected to a checklist of dos and don’ts while working remote. Similarly, employers opting to adopt for longer remote working facilities to their employees as also likely revisit or devise additional documentation to determine the employee’s terms and conditions of employment and safeguards such as data security, confidentiality, employer property and employee’s job duties.
What began as a temporary set – back to conducting business in the country is now a long term situation which has caused a lot of turbulence amongst the industry in the last few months. Having said that, the pandemic is surely changing the face of supply chain management and continued governmental action to ease out SCM operational issues whether related to transportation, warehousing and related activities, supply of labour and ancillary connected activities will surely revive industries at large. Aside from the commercial aspects of every SCM transaction, the legal aspects are also being revolutionized where greater emphasis will be placed on risk mitigation rather than resorting to execution of standard boilerplate agreements and forming of business relationships in haste. The upcoming years will be seeing an unlearning process where carving out of specific circumstances leading to the commercial relationship, emphasis on the impact assessment of each contractual obligation and care taken to construct commercial documents at the time same bringing to record water tight remedial mechanism will be the need of the hour.
–Sanjana Buch (Associate)
[See Part I]