Data Analytics / Business intelligence / Cloud / Standards / Supply Chain

New supply-chain insights, new supply-chain lawsuits

I am cautioning my clients to be very thoughtful about the information collected and the security risks of IoT systems.

In addition to myriad other benefits, the Internet of Things enables more extensive transaction records and greater traceability of data, adding to the ways attorneys and clients can mine information in support of supply-chain cases. This repository of evidence can be audited, of course, and is subject to discovery and disclosure obligations. It may be used against enterprises in legal battles.

In this sense, the Internet of Things presents both an opportunity and a dilemma for supply-chain-information management.

Here we explore this changing legal landscape with Rosemary Coates, president of

Coates Rosemary

Rosemary Coates

BlueSilk Consulting, and Sarah Rathke, partner with Squire Patton Boggs.

These two are co-authors of "Legal Blacksmith: How to Avoid and Defend Supply Chain Disputes.”

Take a look…

Smart Industry: How is the digital transformation affecting supply-chain disputes?

Rosemary: At this point, I am cautioning my clients to be very thoughtful about the information collected and the security risks of IoT systems. Cyber-

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Sarah Rathke

attacks have the ability to reach deep, far, and wide into connected devices to launch an attack or gather information. This kind of attack could be devastating to a connected factory that may rely on machine-to-machine sequencing and balancing. Many companies also give limited access to suppliers or global factories. This exposes a company to further risk because information is traveling outside the four walls of the company and perhaps to other countries, exposing even greater risk. 

In a dispute, information may be everywhere and subject to interpretation. Any information gathered by machines can be required to be produced in a court case. Manufacturers need to be very aware of what data is being recorded and what records are kept. Data may be used either for you or against you in a legal case. As an expert witness, I have seen cases won and lost based on information that was recorded without thoughtful regard for the potential consequences.

Sarah: Rosemary is right. Any information collected becomes fair game in litigation, with open discovery. Companies can circumscribe the information that can be gathered to some degree by choosing arbitration rather than litigation as the dispute-resolution mechanism in their contracts, but arbitration in the US is still very discovery-friendly (in Europe and elsewhere, it is less so). However, the silver lining is that the existence of this additional information may in some cases expedite settlement and resolution. Whereas in the past, Blacksmith Coverquestions like what caused the product failure may not have been answerable, the additional information provided by the Internet of Things reduces disputes, which is a good thing.

Smart Industry: Are any technological developments having a particularly strong impact in this arena?  

Rosemary: As we move toward a more advanced and automated manufacturing environment, the benefits of technology include making smarter decisions and extracting cost out of manufacturing. In my other life as the executive director of the Reshoring Institute at the University of San Diego, I am working with manufacturers across America that are considering bringing manufacturing back to the US. In order to accomplish this, it is imperative that costs be extracted from manufacturing via 3D printing, robotics, 5-axis milling and IoT. Through automation, enough cost-reduction can usually be achieved to make manufacturing in the US more competitive. These reshoring projects often hinge on automation and innovation including new ways of making manufacturing operations efficient.

Connecting machines to the internet opens up lots of new possibilities, too. I have a client that builds a product and connects the product’s maintenance settings to deliver notifications to its home base. So when the machine is in need of maintenance anywhere in the world, it sends a signal via the internet to the company in Silicon Valley, and a maintenance person is dispatched to make the needed repairs on site. The equipment warns when its electronics are failing or scheduled maintenance is due. This helps to assure critical “up time” and fulfill contractual terms for maintenance and repairs.

Sarah: Automation reduces error and ambiguity. This reduces the potential for disputes.

Smart Industry: What are the most common causes of supply-chain disputes? Have these changed over time? 

Rosemary: For my clients, the most common causes are a lack of specificity and understanding of all the terms of the deal. Too often, the engineering staff will agree to things with the vendor and then expect procurement to execute a contract. This sets up the relationship for misunderstanding and ultimately for disputes. In addition, poor project-management and inattention to detail are often at fault in conflicts.

Sarah: Once again, I agree entirely with Rosemary’s answer. Supplier relationships often have two sides that are maddeningly divorced from each other. The legal side negotiates the deal, but has little to do with monitoring performance and enforcement. The operational side, meanwhile, goes about its business without always having a full understanding of the legal impact their words and actions can have. Often, parties go on in this way under a contract for several years, and by the time the lawyers re-engage, there have been so many changes, departures, and alterations of the contract terms in “real time” that it becomes extremely difficult to unpack what is an agreed-upon contract modification versus what is a breach. This difficulty is often then compounded by the fact that the operational side of the relationship has a poor understanding of how to right the ship for a poor supply chain relationship, and does not know (or feel empowered) to re-engage the legal side of the house for information or guidance. Operations then blames legal for drafting a bad contract or for not offering enough instruction as to what the contract terms require; legal blames operation for not abiding by the contract terms. Almost every supply chain dispute I see has no fewer than a dozen occasions along the road where the problem could have been remediated with better information and communication, but unfortunately, that often does not happen until it is too late.

Smart Industry: How does the greater transparency of the supply chain affect customers, suppliers and manufacturers? 

Rosemary: More information and as much transparency as is comfortable with supply-chain partners will most certainly help to improve supply-chain performance. Supply chain used to be all about moving boxes around the world. These days it is all about moving information so that companies can make smart, informed decisions.

Customers, too, want to know where their packages are and when they will be delivered. Companies such as Amazon, Zappos and even the US Post Office now provide traceability so that we know exactly where our packages are in route to us. We now expect this kind of transparency in our everyday lives.

Sarah: With greater transparency into the supply chain, companies can do a better job of identifying where their risk points are. When the Japanese tsunami hit, many tech manufactures realized that their “critical” suppliers were several steps removed from them in the supply chain, previously unknown to them, and concentrated in the region that was hit. Better transparency now allows companies to know more about when and where their products are being single-sourced.

Another area where supply chain transparency has made a difference is, as Rosemary indicates, with consumer preferences and particularly with CSR issues. 2015 saw a rash of a new kind of supply-chain litigation emerge...one in which consumers filed class actions against manufacturers, alleging that their supply chains did not comport with the lofty Corporate Social Responsibility (CSR) statements being made by those companies. Thus, consumers sued chocolate companies alleging their cocoa was harvested using child labor in West Africa, seafood sellers alleging that their fish was caught using forced migrant workers in Thailand, and Whole Foods alleging that its suppliers did not comply with Whole Foods’ publicly touted animal care policy. Meanwhile, allegations like these and others have led the US government to eliminate the so-called “Consumptive Demand” exception to its trade laws, and customs officials are now turning away goods from entry into the US where there is a credible allegation that those goods were made using forced or prison labor. Supply-chain transparency helps companies see and understand more about their supply chains, but transparency also allows third parties access to greater information.

Want more? Check out the white paper, “IIoT Protocols to Watch,” right here.

 

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