Businesses’ Duties to Protect and Support the Supply Chain in Covid-19 Pandemic

The Covid-19 pandemic has had a devastating impact on global supply chains.  In a note prepared by the OECD Centre for Responsible Business Conduct it was reported that a significant percentage of supplier factories had seen their activities drop by 50% or more and there is overwhelming evidence that suppliers are having to lay off or furlough large numbers of workers and are struggling to maintain liquidity sufficient for them to stay in business.  Specific challenges for suppliers have included order cancellations and refusal of customers to pay for production costs and raw materials associated with work already done prior to cancellation of orders.  Companies and workers in certain countries are particularly vulnerable to the supply chain disruptions associated with the Covid-19 pandemic: Bangladesh has over four million people, mostly women, working a garment sector that accounts for more than 80% of the country’s annual exports and which has essentially been brought to a halt by the pandemic.  Lack of clarity as to if and when final demand for goods coming out of supply chains will recover has further complicated supply chain management.

The Institute for Human Rights and Business (“IHRB”) noted that governments and companies were taking steps to redesign their supply chains to bring production “closer to the market” in response to the disruptions caused by the Covid-19 pandemic and cautioned that the corresponding disinvestment in the developing world and loss of jobs in developing countries would have severe consequences on the lives of the poor people in developing countries.  The IHRB suggested that the better long-term approach would be for businesses in the richer countries to spread their risks and investments over a wider range of countries, accepting some level of inefficiency in exchange for reduction of reliance on one region or a few countries and allowing more countries to participate in the global economy and attain higher standards of living for their people.  The IHRB pointed out that supporting the business case for expanding, rather than contracting, the supply chain are the trends toward sliced production processes and lower shipping costs that have allowed companies operating all around the world to thrive by specializing in niches and the role that supplier diversification can play in “pandemic-proofing” the global economy.

The IHRB provided ideas on further steps that companies should take with regard to companies in their supply chain and their workers, beginning with more robust mapping of their supply chains to identify the most significant vulnerabilities to the health crisis and thus allow them to make plans to address operational issues and provide support to suppliers in managing their responses to the crisis.  Specific actions might include attempting to address the adverse impacts of unemployment throughout the supply chain due to reduced business as a result of the pandemic by not cancelling pending orders, making timely payment on outstanding invoices and continuing to provide financial support to vendors even if further action production is not required (perhaps in exchange for commitments from suppliers that employees will be furloughed rather than having their employment relationship terminated).  Suppliers should be provided with assistance on implementing safeguards to protect their workers from the adverse health impacts of the pandemic and companies should adjust expectations regarding the speed of production so that suppliers are not pressured to put their workers at risk to fulfill commitments.  The IHRB argued that companies could also build capacity among their suppliers and in the countries where those suppliers operate by providing training and offering jobs for the newly-unemployed.  In appropriate circumstances, companies may also be in a good position to serve as powerful advocates for strengthened social protection in dialogues with the host governments.

General suggestions for companies on steps to be taken to manage relationships with suppliers during the Covid-19 pandemic can be found in the OECD Center note referred to above and in guidance published by Business & Human Rights (“BHR”) and Semilla:

• Appoint a person who would be primarily responsible for managing the company’s actions relating to the impact of the Covid-19 pandemic along the company’s supply chain
• Liaise with procurement and sustainability teams to understand supplier or business partner vulnerabilities (e.g., supplier performance on industrial relations and health and safety precautions) and assess the impacts that the company’s actions as a consequence of the Covid-19 pandemic might have on the supply chain
• Establish active communication mechanisms with suppliers to share information and develop collaborative and flexible approaches to preventing, mitigating and remediating risks and adverse impacts to suppliers
• Collaborate with governments, industry partners and inter-sector initiatives to develop joint solutions to risks and adverse impacts on suppliers
• Assess the socio-economic impacts of any proposed suspension, cancellation or reduction of orders or other types of business with suppliers and business partners
• Adopt a flexible approach to addressing suppliers’ risks and adverse impacts that takes into account rapidly changing events and ongoing collection of deeper information regarding the specific situation of suppliers
• Realizing that some suppliers will need to be replaced in order to deal with critical disruptions, develop a rapid response supplier due diligence plan for new sources and suppliers that focuses on the most significant issues that might affect contingency planning given what is becoming know about the long-term effects of the pandemic

Specific advice from BHR/Semilla on protecting persons in the supply chain focused on three types of risks and impacts beginning with contagion risk for workers within the supply chain, which companies were asked to address by sharing information with suppliers on the measures that they had adopted to protect their own workers (including assuring safe conditions in housing that suppliers make available to their workers), establishing communications mechanisms with suppliers to understand their situation and approach to risk management and reviewing the measures adopted by the suppliers and collaborating closely with them to support necessary improvements.  The second set of risks and impacts related to payment retention and it was suggested that companies attempt to establish flexible payment schedules to support suppliers and advance payments to suppliers if necessary to facilitate their cash flow.  The third set of risks and impacts related to the interruption, slowdown, reduction or termination of commercial relationships with suppliers which companies could attempt to manage by reviewing, in light of their own impact assessments, their purchase policies and practices; eliminating possible contractual penalties applicable to deadlines and other operational issues; and adjusting the terms of orders to provide suppliers with more flexibility and allow them to avoid taking actions that adversely impact the rights of their workers (e.g., overtime or unauthorized outsourcing of production).  Companies could also assist suppliers by making arrangements for them to refocus their activities to produce items essential to combatting the Covid-19 pandemic such as personal protective equipment.  This is important because it will keep suppliers’ workers engaged and avoid other adverse impacts of letting workers go such as closing housing for workers and their families.

This article is an excerpt from the author’s forthcoming book on Business and Human Rights to be published by the American Bar Association (Section of Business Law) in Fall 2020. For further information see the website of the Sustainable Entrepreneurship Project.

Sources: Respecting Human Rights in the Time of the Covid-19 Pandemic: Examining Companies’ Responsibilities for Workers and Affected Communities (Institute for Human Rights and Business, April 2020), Covid-19 and Responsible Business Conduct (OECD Centre for Responsible Business Conduct, 2020); and Covid-19: Business and Human Rights (Business & Human Rights/Semilla, April 2020).