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OM in the News: COVID-19, Force Majeure and Supply Chains

July 15, 2020

Global industry is now 6 months into the COVID-19 pandemic and its effects on supply chains, and the broad features of the event are becoming clearer. As the first wave of the pandemic has washed around the world, few businesses have been unaffected.  About 75% of American companies, and 97% of international firms, have experienced  some supply chain disruptions, writes IndustryWeek (July 9, 2020).

Some sectors, such as agriculture and food processing, have seen sharp increases in demand and pivoted swiftly into new opportunities. Others, such as aviation and apparel, have encountered demand collapses and faced extremely difficult supply chain management challenges.

Nearly 1/3 of companies reported that they had already faced a claim that a supplier or customer was excused from performing their obligations under an agreement because of the law of force majeure. This concept allows one party to a contract to claim a right to suspend, or stop, their fulfillment of their end of the bargain, because of an intervening event that is outside of their control and that overcomes their ability to perform as both parties had expected.

The COVID-19 pandemic is unlike the sorts of events to which force majeure law usually applies, and presents multiple risks.  The “usual” force majeure event – like a facility fire or a hurricane – is limited in time, scope, and geographic place. The current pandemic, however, is persistent and worldwide. It can seem as if a global pandemic and state-ordered shutdowns must qualify as “acts of God.”  But the law on the subject differs widely from place to place, and is flexible.  Most cases will be highly fact-specific, and subject to maneuvering.

The COVID-19 pandemic will be with us for some time, and for business the waters will remain between choppy and treacherous. Careful, systematic and forward-looking management of the supply chain disruptions that are occurring now may make the difference in results.

Classroom discussion questions:

  1. Why is force majeure an OM issue?
  2. What other supply chain risks are companies facing today? (Hint: see Chapter 11’s Table 11.3 in your Heizer/Render/Munson text)
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