Supply Chain Management

Supply chains in companies always receive particular attention during times of crisis. However, companies should keep a constant eye on their relationships with suppliers and continuously evaluate — and, where necessary, adapt — their procurement and logistics operations, i.e. their supply chain.
The deceptive nature of the supply chain lies in its apparent resilience during economically healthy times. When things are going well, it is possible to focus without risk on individual aspects such as purchase prices or short-term product availability under ideal conditions. The longer economically stable phases last, the further a holistic risk assessment of the supply chain recedes into the background. “It’s working fine” is something decision-makers often say in such periods.
In a crisis situation, whether company-specific or economy-wide, the true resilience of the supply chain suddenly becomes apparent. When individual suppliers fail, transport routes no longer function, or in extreme cases entire states collapse, the supply chain breaks down or significant bottlenecks arise.
Through supply chain management that considers risks in a balanced way and not just individual success factors, companies achieve an optimal profile across the triad of

• Costs
• Functionality / customer benefit
• Risks

and build a stable, resilient supply chain that provides them with a clear competitive advantage.
Supply chains today are in most cases organised internationally and sometimes globally. Raw materials, intermediate products, and finished goods are frequently shipped halfway or all the way around the world. This is due to relatively low transport costs, local (favourable) cost structures, but also to sales markets that require or favour final assembly on-site yet lack a supplier ecosystem. This cannot be changed overnight.
Building resilient supply chains therefore takes time — in our experience up to two years, including developing suppliers to the desired level.

The Supply Chain Task Force

In acute crisis situations, but also in day-to-day business, we recommend a multifunctional task force equipped with responsibility and clearly defined decision-making authority that can work in an agile manner —

• i.e. quickly and without bureaucracy. A distinction must then be made between normal mode and crisis mode: in a crisis, this task force can introduce new, time-limited rules and implement them immediately. While quality and safety must in no way be compromised, decisions on core criteria such as costs, inventory management, and the onboarding of alternative suppliers must be possible without necessarily adhering to potentially long-established and time-consuming procedures.

For manufacturing companies — the backbone of the German economy — the task force should be composed in an interdisciplinary manner from the functions of

• engineering, procurement, logistics, production, and finance. These teams will work together on a daily basis and, depending on the size of the company, will also be connected globally. Whether they work together in an office (control centre) or from home should make no difference here.

This is where the difficulties begin for many smaller companies. The right tools are often not available to enable employees to work and interact digitally. We are referring here more to structural or data-related issues than to employment law or data protection questions, which of course require very careful consideration.
In general, forming interdisciplinary teams of this composition — let alone with decision-making authority — is a challenge. This requires shaking up an organisation and, above all, raising awareness among decision-makers about risks. This must be taken on by managers and employees who are qualified in risk-related topics and possess the appropriate professional authority. A well-trained organisation will embrace this culture of risk and error positively and respond with flexibility. Furthermore, if digital communication tools are the standard within an organisation, rapid collaboration is possible regardless of the location of individual team members, and crises can be contained just as quickly.

Characteristics of a Resilient Supply Chain

• Very long supply chains that are reliable in stable times are secured by shorter supply chains as an alternative (in 2019 alone, the German economy sourced goods worth approximately EUR 106 billion from China, according to the Federal Ministry for Economic Affairs)
• Moving away from so-called single sourcing — even for extremely demanding products or pure commodity goods, at least one alternative supplier at a second location is developed
• The pure low-cost strategy is replaced by a best-cost strategy that also incorporates other factors such as proximity, reliability, etc.
• The “just-in-sequence” approach with minimised inventory is replaced by a warehousing strategy adapted to risk scenarios (in-house and third-party)
• For particularly critical components or intermediate products, near-shoring or, for new products, direct relocation of production to the main site is considered
• The stable availability of products in the desired functionality and quality is an essential component of customer value and is either a) offensively priced in or b) expressly no longer guaranteed in the event of required price reductions
• Software, databases, and AI systems are used more extensively to maintain an overview of procurement markets and bottlenecks
• An interdisciplinary task force manages the procurement process systematically, identifies and names risks, maintains scenario plans, and intervenes immediately in the event of a crisis
• Both factors (IT and task force) can, via so-called digital twins, map reality in real time and model, evaluate, and translate the impact of crises or disruptions into blueprints
• The interdisciplinary task force also engages in regular knowledge exchange outside of crisis situations and establishes agile knowledge management as well as systematic knowledge controlling across all aspects of the supply chain

Tax Factors in Supply Chain Restructuring

• Relocations of production within the EU have different implications than those between the EU and third countries — each individual case must be examined carefully
• The same applies to the relocation of procurement via local third-party suppliers, which deliver either to the local subsidiary or, for example, to the German parent company
• All relocations between countries can have implications for transfer prices and thus affect the taxes of both the local company and the parent company (e.g. holding)
• Transfer prices must be well documented and withstand an arm’s length comparison; otherwise, tax disadvantages may arise
• Relocations of procurement and production can result in profit shifts — here there is a not insignificant risk of exit taxation in the respective countries
• Reorganisations of the supply chain can disrupt the structure of value contributions of individual companies or functions — in this context, the restructuring of value contributions is aimed less at cash flows and more at the gain in value (profit potential), which in turn may involve the setting of new transfer prices
• In this scenario, capitalisation interest on newly allocated profits and their tax implications, together with structuring options, must also be considered
• Relocations of any kind outlined here give rise to special documentation obligations; even in very dynamic globally distributed corporate groups, these are by no means routine transactions in day-to-day business, but rather extraordinary business transactions within the meaning of § 90(3) AO — the utmost care is strongly advised here

Legal Factors in Supply Chain Restructuring

• Particularly in supply chains, compliance with national and local laws must be ensured — what is permitted and what is prohibited can vary considerably even within the EU
• Well-coordinated contractual arrangements are required: for supply chains involving third countries outside the EU, but also within the EU, it must be clarified which law applies and which court or arbitration institution has jurisdiction
• It must be clarified whether judgments or arbitral awards can be legally and practically enforced in the respective country. In Russia, for example, judgments of European courts cannot be enforced due to lack of recognition, whereas arbitral awards can be — tip: arbitration courts are generally recognised internationally
• All clauses, in particular general terms and conditions, must be checked for their validity in the other countries concerned. In the Netherlands, for example, extended retention of title clauses are generally ineffective
• For force majeure and crisis clauses, in addition to ensuring legal validity, the applicable formal requirements must be established — such as the “Force Majeure Certificate” in China, which is issued upon application by companies based in China by the China Council for the Promotion of International Trade (CCPIT)
• Crisis situations require special precautions, such as a force majeure clause that must also apply in the third country concerned; these clauses should contain as many grounds for force majeure as possible — not only the well-known case of an earthquake, but also, for example, a pandemic
• UN sales law (CISG) should be agreed upon and not excluded, as it applies at least in signatory states and there is case law on it, providing a degree of legal certainty (e.g. Art. 79 CISG)
• The respective national export conditions must be reviewed, as must customs and import conditions: many products must first be approved for the European market before customs will release them
• It should be carefully examined which international delivery terms (INCOTERMS) have been effectively agreed upon