News
Wednesday 24. February 2010
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| Emergency plans as a protection against supply failures |
| Assembly lines need not stand still when suppliers go bankrupt. Yet all too often, company managers will be slipshod in their preparation of such an emergency. |
| By Chris Löwer, Berlin When the Leverkusen-based brake manufacturer TMD Friction filed an insolvency petition a little over one year ago, even major car manufacturers were trembling. Production lines were on the brink of stopping at BMW, Mercedes and the Volkswagen group because the supplier is considered a key company in the automotive industry. Probably, no other supplier would have been able to quickly take its place. TMD Friction was just able to avert disaster thanks to a financial investor stepping in. But many other companies will be on the brink of similar situations this year, and not every one will find its savior: Because according to Creditreform, a credit reporting agency, ever more small and medium-sized companies get caught up in the maelstrom of the tidal wave of bankruptcies. Last year, barely half of the insolvencies were from small and medium-sized companies; this year, the rate might increase to over 80 percent – and thus, many important suppliers might disappear from the scene. When that happens, things can suddenly get tight for business partners. Often, production may be paralyzed already when one supplier no longer supplies a special part. And the consequences will be disastrous: There will be a torrent of contract penalties because companies cannot meet due dates, reputations will suffer, and customers will turn away. Anyone having to rely on a substitute supplier has to expect that prices will be dictated. Companies ignore the risks. Many businesses are not prepared for such bad case scenarios. According to a study by the auditing company Mazars Hemmelrath, every fourth German company would no longer be able to supply within twelve weeks if even just one supplier of critical components becomes insolvent. Every tenth company has no idea of what would happen to it if worst came to worst. Many simply ignore the risk – even if there are increasing signs for a threatening insolvency. "I think it's a fairy tale story that an important supplier will fail just like that without any warning sign. Anyone who is engaged in risk management would not be surprised", says Gerd Kerkhoff, boss of the Düsseldorf-based consultancy Kerkhoff Consulting. He goes on to explain: Indications for pending hardships would be, for example, that supply dates are not met, or that credit insurers are hesitant, or the supplier is having a try at getting the periods of payment reduced. Sometimes, the supplier's staff also hints at having to wait longer to get paid for their work – or they might even carefully put their feelers out asking whether there might a job for them. High job fluctuations and workforce reductions should also alert a partner. Several suppliers will provide security. "It's important that people seek a dialog early on", says Kerkhoff. In his experience, industrial buyers are increasingly doing it because they are interested in long-lasting supplier relations. "Many of them have noticed that suppliers with special products must stay alive so that they themselves will not get into difficulties", he says. Sometimes, it makes sense to have advance financing for materials. But it's better yet not to even get into such dependencies. Accordingly, Kerkhoff is not keen on the single sourcing strategy promoted for a long time with only one supplier for one product group. Even if the amount of the volume rebates should suffer, it would be better to distribute the load on two or three shoulders. But especially smaller companies will bunch their orders for a completely different reason: "Purchasing is still being done all around their own location because there are close personal relations between buyer and supplier", says the purchasing expert Kerkhoff. And this often goes hand in hand with too much leniency. "One cardinal error, especially in the sector of small and medium-sized businesses, is to take well functioning relationships for granted and to think they will last forever", says Dirk Thiel, General Manager of the Cologne-based Gesellschaft für Bonitätsbeurteilung GBB-Rating. Especially when collaboration has been running smoothly over many years, a lot of managers tend to become careless. "Yet, a company's credit rating can go down within a few months", says Thiel. Nobody should shy away from awkward or embarrassing questions if they suggest themselves. A domino effect is threatening. Especially those companies who need complex components will seldom be able to counterbalance any failure of their suppliers at short notice. "A domino effect will then be looming: Other struggling companies will get into dangerously difficult situations if they can no longer complete their orders according to due dates", says Thiel. And that's when you can forget about the formerly reasonable and low-cost calculation if a substitute supplier cannot or does not want to deliver at the usual terms and conditions. A scenario that might become a reality for some companies this year. "In view of the slight upswing of the economy, the risk has not yet been banned; increasingly more suppliers will go bankrupt", says Thiel. Those beginning just now to develop a plan B might already be too late. Jointly taking countermeasures. The alternative will be to establish a close relationship to the supplier. If he is included, for instance, in research and development, this will not only bring about better products. Closely connected partners will also better know the strengths and weaknesses of the respectively other partner. And in critical situation, they will then be able to jointly take countermeasures. Moreover, with a partnership, companies are much better in fending off the risk that business secrets will pass over to competitors. It's not unusual for a rival to buy up cheaply the insolvent's assets including documents for a jointly developed innovation. This is a serious risk especially with automotive suppliers. In contrast, those who will build up their supplier relations on a solid foundation can safely put their emergency plans in cold storage – and thus save a lot of money. Because if a supplier becomes insolvent, a company must manufacture the necessary components on its own if worst came to worst. Still more expensive would be the case where, for example, a machine would have to be produced differently so that a special part manufactured by the insolvent supplier will no longer be needed at all. |
