A company can consider extending a bridge loan to a troubled supplier, generally secured with some asset, such as equipment or real estate.
However, in both the co-buy and loan strategies, as well as other financially-oriented moves, companies need to “make sure the assistance is structured in a way that the assisting company is not taking on unwanted liabilities from the receiving supplier,” cautions Gregg Brandyberry, vice president procurement, global systems and operations, for GlaxoSmithKline, in a recent edition of ISM’s Inside Supply Management magazine.
Improve Payment Terms
A key factor in the financial struggles of many suppliers is that their customers often pay even more slowly than usual as they face their own economic challenges. Such cash flow issues, more than issues with the fundamental business, are often the direct cause of a supplier failure.
For strategic suppliers facing cash flow issues, companies can consider actually speeding payment terms, rather than stretching them out.
Often, a large company has expertise in procurement, manufacturing and other disciplines that could help a struggling supplier increase its own efficiency. For example, a company with strong Lean manufacturing expertise might be able to quickly identify some process changes that would reduce a supplier’s internal costs. Ditto with procurement processes (e.g., are there opportunities for on-line reverse auctions that aren’t being used?).
While in good times suppliers may not welcome such unsolicited “advice,” struggling firms may be much more open to the idea.
Accept Price Increases
While probably an item of last resort, companies can consider accepting a price increase from a struggling supplier. This strategy probably makes the most sense where a supplier price was locked for the contract period and its own cost drivers (material costs, etc.) have moved upward.
Finally, companies of course need to be prepared should a supplier fail, through the usual tactics of dual sourcing, holding inventory, etc. But an often overlooked step, especially when sourcing globally from low-cost countries, is making sure intellectual property is secured and recoverable.
When does it make sense to shore up a financially struggling supplier? What other strategies would you add to our list? Let us know your thoughts at the Feedback button below.