Repairing the supply chain

The world’s economy functions by means of intricate, extended supply chains: raw materials are shipped to parts makers, then parts are shipped to factories, then finished products to shippers, truckloads to wholesalers, then retailers. But when the massive earthquake and tsunami rocked Japan, this supply chain was interrupted.

All of a sudden, uncertainty gripped producers around the world. But amidst the inevitable chaos was an underlying layer of certainty provided by contracts. Businesses typically plan for disaster by inserting so-called force majeure clauses in their contracts. Through such clauses, customers agree to excuse performance when a disaster like the 3/11 quake makes performance impossible. This places hardships on each customer, but it gives the company hit by disaster a chance to survive and regroup. Without such clauses, hard-hit companies could be immediately sued by customers and bankrupted.

Companies also have an option of purchasing business interruption insurance, which can reimburse profits lost when a disaster destroys company assets, and contingent business income insurance, which kicks in when a company’s supplier can’t deliver because of a disaster at its place of business. (Another beautiful aspect of global capitalism is that companies unaffected by disaster can leap into action, offering contracts aimed at picking up the slack left by temporarily incapacitated producers.)

None of these contractual devices is a cure-all. Disaster damage is still damage, not “economic stimulus,” and it must be repaired by intense effort, diverted from other tasks. But careful contracting can maximize certainty in the most uncertain of times.

Image: Wikimedia Commons

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