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Diversified Industrials: Horizons

Digitalization. Complex supply chains. Growing regulation and compliance. Conglomerates and industrials operate in an increasingly dynamic environment – one which requires creative solutions and forward thinking.

In a world of economic change, supply chain contracts are impacted

By Turki Alsheikh and Ben Hornan

When it comes to supply chains for complex conglomerates, thorough due diligence is key.

That might sound obvious – of course you should know information about your suppliers and customers. But amid so much macro-economic turmoil, such as the U.S.-China trade war, Brexit, and complex procurement legal structures around the world (e.g., restrictive policies in the Middle East), conglomerates need to understand how their supply chains can be affected.

Supply chain contracts with suppliers and customers will be strongly impacted, especially considering the evolving nature of worldwide regulatory structures.

Companies may look at Brexit or the U.S.-China trade war as an opportunity to terminate contracts that have become unprofitable or are now considered too onerous to perform. Though the impact remains to be seen, the odds are this will result in an increase in disputes – especially cross-border disputes – between suppliers and customers that will eventually end up in the courts and in arbitration.

So, what are conglomerates to do?

They need to conduct an internal audit to evaluate all supply chain contracts and determine what mechanisms might exist in the contracts for maintaining or exiting relationships. These mechanisms – such as force majeure provisions, material adverse change clauses and the like – can have a significant effect down the line.

When drafting new contracts, companies should also carefully consider the appropriate mechanism for enforcing their contractual rights – for instance, whether arbitration may be more effective than litigating in the national courts of a particular state. New contracts also require conglomerates to undertake extensive due diligence on the third party's regulations and government in their country. For example, Saudi Arabia recently passed a new procurement law that will greatly affect conglomerates operating there. Many Middle Eastern countries focus on business-to-government structures, as opposed to business-to-consumer structures. Hiring a local lawyer who understands the ins and outs of these laws will lead to a less risky and more compliant supply chain.

Lastly, technology – in particular "big-data" analytic techniques, as well as the Internet of Things – will become increasingly important as conglomerates assess their intricate supply chains. Big supply chain analytics uses data and quantitative methods to improve decision making throughout the supply chain, while the Internet of Things and innovations such as 3D printing are revolutionizing manufacturing processes. These technologies will help to create efficiencies and add value for all activities across the supply chain – from the operations planning stage, to sourcing, manufacturing, and transportation, through to point of sale.

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