26 February 2018

KFC and other supply chain issues

After recent incidents involving food suppliers Russell Hume and 2 Sisters, last week fried chicken giant KFC was forced to close over two thirds of its UK restaurants due to supply chain issues with its new logistics partner, DHL.

The closures began across the UK late last week when restaurants began to run out of fresh chicken. It has since been reported that DHL, which recently took over KFC’s supply contract from previous supplier Bidvest, encountered difficulties delivering the chicken to KFC’s restaurants. The problems have been running for a week and are continuing.

These supply chain issues highlight the financial and reputational impact that can affect a business, and the importance of having a robust agreement in place in the event that problems arise.

Ensure you have a robust written supply contract

Without a written agreement in place, it can be unclear how businesses should deal with an incident and any resulting losses. It is therefore important that businesses have a robust written supply contract.

Key clauses businesses should include in any supply agreement are:

1. Rectification process

When something goes wrong and time is of the essence, it is crucial that both sides are clear about who is responsible for rectifying the issue and the steps that they are required to take. The supply agreement should include provisions to deal with delivery failures, defective goods, and product recalls, which set out each party’s responsibilities in such events, as well as a timeframe for those steps.

2. Warranty

Any supply agreement should include suitable warranties in respect of the goods or services provided. Without such provisions, a customer will struggle to show that defective goods or services failed to meet the standards required under the contract. Equally, without such a clause, a supplier may be unclear about the specifications and standards the goods or services are required to meet, which can lead to misunderstandings and subsequent disputes between the parties.

3. Indemnity

Businesses should consider including an indemnity for losses where these would stem solely from the other party's breach of the agreement. The indemnity should include consequential losses, such as loss of profits that are “indirect” losses and can be more difficult to recover in the absence of such a clause. Many standard supplier terms and conditions will limit compensation to, for example, the cost of replacing the goods themselves, or specify a maximum sum payable. This may be considerably less than the actual losses suffered by the customer.

4. Reputational damage

Reputational damage to a business can be substantial and can surpass the costs of any defective goods themselves. However, careful drafting is needed to ensure that this type of loss is both quantifiable and that an indemnity clause covering it could not be successfully challenged for being a ‘penalty’ clause within the supply agreement.

5. Insurance cover

The announcement this week that Russell Hume has gone into administration demonstrates that when major incidents arise with a supplier it can lead to a catastrophic failure of the business itself. In those circumstances, a contractual obligation to pay a customer for lost profits is worth nothing if there is no money in the pot to make that payment. Consequently, customers may wish to consider imposing a contractual obligation on their suppliers to obtain insurance to cover any incidents.

There are a number of policies available that may cover some or all financial losses arising from food safety or supply chain issues. However, business should make sure that they think about what kind of losses would actually arise and specify the level or type of cover required. Many policies will only cover the cost of goods themselves and not lost profits. Alternatively, businesses should consider whether to take out their own insurance to cover any losses arising from supply chain issues.

6. Confidentiality

A supply agreement should contain robust confidentiality provisions to prevent either party from disclosing sensitive information about the other. Such a clause will be a vital if a crisis emerges, but will also deter parties from using confidential information belonging to the other party to its own competitive advantage.

7. Dispute resolution

Finally, any supply agreement should set out how the parties wish to resolve a dispute where something has gone wrong. Many businesses enjoy longstanding relationships with their partners. It makes sense for a dispute resolution clause in the agreement to include a mechanism to help the parties to try and resolve the issue before it escalates into legal proceedings. This could be via meetings between senior management and/or mediation, before either is entitled to issue court proceedings.

Have a clear incident response plan and communications strategy

Aside from having a strong written and signed supply agreement in place, businesses that tackle safety and supply chain issues effectively are generally those that have a clear incident response plan in place in advance of anything actually happening. It is therefore well worth any food business spending some time ensuring that a plan is in place for tackling incidents and communications around them. It is crucial that everyone (including customer-facing personnel, communications and marketing teams, buyers and board members) know where it is, what it says and how to access it in the event that a supply chain issue arises.  

Getting external communications right from the outset is also key. Businesses that tend to do best when problems arise are those that are up front at an early stage about explaining to customers what has arisen. In the era of social media and 24/7 news feeds, trying to sweep a problem under the carpet is not a wise approach.

Key contact

Helen Scott-Lawler

Helen Scott-Lawler Partner

  • Head of Food and Drink
  • Commercial
  • Intellectual Property and Media

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