Supplier in difficulty – tips on how to
recognise and manage
It has always been important for Purchasing and
Supply Management Professionals (P&SM) to be
aware of the financial health and trading position
of suppliers. With many organisations facing
increasingly challenging and uncertain conditions,
it is arguably more important than ever that we are
close to our suppliers.
professional can pick up from “day to day” dealings
with a supplier. One of the most effective ways of
assessing a supplier’s position is through regular
visits to their premises. These visits should increase
in frequency if there is a belief that the supplier
may be in difficulty. What signs can we pick up on
a supplier visit?
If a critical supplier – that is one whose products or
services are essential to the continuing operation of
our own organisation - goes out of business with
no apparent warning (or at least no warning that
we have made ourselves aware of!) what are we
going to do?
1. A reduction in the number of staff may indicate
a downturn in the activity of the business. Whilst
there may be a valid business reason other than
the supplier being in difficulty, questions should
be asked to drill down into the reasons for the
downturn.
2. A change to working patterns may signify a
downturn in the supplier’s business. For
example, if a manufacturing company that has
operated a three shift system changes to a two
shift system, it may indicate that the supplier is
in difficulty, especially if the change cannot be
accounted for by normal patterns such as a
seasonal downturn.
3. If there is evidence of work only being carried
out for a small number of customers.
4. A sale of assets such as premises or equipment
may point to a contraction in the business.
5. A lack of investment in the business, possibly
the supplier is increasingly reliant upon old
technology and working practices in comparison
to its competitors.
It is not a particularly comfortable place to be when
all eyes from the Operations Director to the
production worker (who may be sent home if
production stops) are upon you seeking a solution.
Far better to have already identified the supplier’s
problems early and to have agreed a course of
action, either with the current supplier or with an
alternative source in order to ensure continuity of
supply.
Businesses rarely fail without some outward signs
that they are in difficulty. However, most will
attempt to reduce outward signs of difficulty in
order to maintain an air of normality in the hope
that they don’t set off “alarm bells” with customers,
suppliers and staff who may decide to “abandon
ship” if they believe the business is in trouble. This
obviously makes the task of saving the business
even more difficult.
The tell tale signs
Exactly how can P&SM professionals pick up on
signals that a supplier is in difficulty? Information
for analysis, such as reports and accounts, are
publicly available to the P&SM professional to
analyse, but these, by their very nature, lack
recency. This type of information may give a longer
term ‘heads up’ that a supplier needs a closer
watch, however, there is also much that the P&SM
Tangible signs are not the only signs that we can
pick up that suggest that a supplier may be in
trouble. Suppliers will have a certain “feel” to them
which the astute P&SM professional will pick up.
Behaviours will probably change when a supplier is
in difficulty. For example, an organisation whose
personnel have previously exhibited an open
approach to sharing information may become
guarded. There will be a reason behind this which
should be explored. Similarly, if answers to
questions become uniform and appear to be
“coached”, this may signify that there are problems
at the supplier.
Tel +44(0)1780 756777 Fax +44(0)1780 751610 Email ckw@cips.org Web www.cips.org
JAN 09
Supplier in difficulty – tips on how to
recognise and manage
On its own, one of the above factors may not
indicate that the supplier is in difficulty, however,
where several of the factors are evident then further
investigation is required.
Supplier in difficulty
What can we do once we have identified that a
supplier is in difficulty. but not yet in any legal
process? If there is another viable source for the
goods of services, the most obvious course of action
may appear to be change suppliers. However, if our
company is a significant customer representing a
large proportion of the supplier’s turnover, this
course of action may just speed up the supplier
going out of business. Apart from the ethical
consideration as to whether this would be an
appropriate course of action, there can be a
reputational risk and impact on brand value in
being seen to be associated with a supplier’s demise.
In this situation, a large organisation can attract
significant adverse publicity in which can take
considerable time and expense to repair.
The branding consultancy, Interbrands, which
undertook a study of “The Best Global Brands”
concluded that, on average, brand accounts for
more than a third of share holder value. Clearly
reputational risk should not be taken lightly. Of
course there are other good business reasons why
staying with and supporting the supplier should be
considered, such as the time already invested in the
supplier relationship and the disruption that
changing supplier may bring.
Explaining to the supplier that your organisation’s
preferred option is to continue using the supplier
will hopefully lead to a frank and open discussion
exploring why the supplier is experiencing
difficulties, what their proposed course of action is,
and what you may be able to do to assist. It is not
unknown for a contributing factor to the supplier’s
difficulties to be the actions of the buying
organisation!
Case Study
A training provider was awarded a contract to
deliver a diversity training programme across the
entire operation of a major distribution organisation
that had multiple operating sites and several
thousand personnel.
This was the largest contract that the training
provider had won. However, it was within their
capability to deliver through the use of an
additional network of associate trainers. During the
contract it became apparent that all was not well
with the supplier and that, whilst delivery of the
training was generally excellent, there were clearly
financial difficulties within the supplier and several
of its associates.
Rather than immediately seek another source of
supply, which would have most likely caused delay
and disruption in the delivery of the training, the
customer decided to be supportive and have an
open discussion with the supplier. It transpired that
the supplier was experiencing severe cash flow
problems largely brought about by carrying out the
training delivery whilst failing to manage the
programme cash flow.
The business units in the client company were not
helping the situation by failing to raise purchase
orders for the training and the supplier was
reluctant to chase. The customer decided to make
immediate payment to the supplier of sufficient
funds, to give advice on cash flow management and
on how to be more assertive in its relationship with
the customer. This ensured that the supplier and the
programme got back on track.
Of course, each situation is different and the P&SM
professional must weigh up the pros and cons of
the possible options.
Tel +44(0)1780 756777 Fax +44(0)1780 751610 Email ckw@cips.org Web www.cips.org
JAN 09