In Part 1, found here, we looked at how to deal with the economic frailties of customers.   In this second note, the focus turns to critical suppliers.  

The loss of a critical supplier can be more damaging to a business than the loss of a customer.   A business could be left with no inventory, suffering from business interruptions, or having to pay increased input costs.   There could also be significant problems finding alternative supply sources where there is a unique process, material, geographic location or price point involved.   In certain circumstances, the loss of a critical supplier will put the whole business at risk.

There are ways to protect against this, as long as a company heeds the following warning signs:

·     Fulfilment Issues. Delays, missed deliveries, and product and service quality deterioration are all signs of potential trouble with a supplier.   There may be reasonable explanations for these problems, but they should put a company on guard.  

·     Management and Employee Turnover.   Just as this is a concern with customers, it is an equal concern when it happens with suppliers.   They have access to inside information that you will not be aware of, so significant departures warrant closer scrutiny.  

·     Silence and Aversion.   Anytime that a supplier seems to be avoiding you or does not answer calls this should set off alarm bells.   This is a clear signal that something is wrong and should be taken very seriously.

·     Changes to How Business Has Been Done in the Past.   This can come in the form of attempts to renegotiate contractual terms, unexpected price increases, requests for deposits or prepayments, or requests to speed up collections.   These are commonly used as a way for a supplier to ask for help in an indirect manner.

·     Actions by Creditors.   Litigation and Judgments are a further strain on the resources of the supplier and often indicate that defaults have already occurred.  

When some, or all, of these warning signs are present it will be necessary to take steps in order to secure critical supply.

One such step is to review your contractual termination rights.   If supply can be obtained elsewhere then it may be prudent to terminate the contract, as permitted by the terms of the contract, and enter into an agreement with a new supplier.   Another option is to use the situation to strengthen your rights under the contract.   At the same time, resourcing alternatives should be considered.   Even if the contract is not being terminated, it is always a good idea to have a backup plan in order to decrease any future business interruptions should the current supplier fail to meet its contractual commitments.

While you should be prepared to support the supplier, that support can be traded for accommodation and access agreements.   These agreements can include provision for guaranteed volume, possession on default, or access to financial information.   In certain circumstances, direct interim loans to the supplier may be a consideration, as is taking an ownership stake in the supplier.   Even as the support is being given to the supplier, a plan B must also be developed.   This can include arranging for resourcing or negotiating with the supplier’s creditors for a forbearance period.

Effectively managing in an economic downturn requires constant monitoring of customers, suppliers, and the business environment.   Only through constant awareness of what is occurring around you can you properly prepare to meet all challenges that may arise.

To learn more about the law applicable to restructuring an insolvency, and professionals who can help you, visit our website  here.

If you have any thoughts about the above or any questions about managing in an economic downturn, we would love to hear from you.   You can reach the writer at  gary.graham@gowlings.com  or you can visit our website at  www.gowlings.com/industry/md.asp.