Giving Your Suppliers a Second Financial Chance: Tossing the Lifeline
As we all know, it's trying times for many of our suppliers. But what can you do to help -- especially for those suppliers that are critical to the business? Supply Chain Digest recently ran a useful little number that discusses some of the options that procurement organizations have at their disposal to lend suppliers a helping hand. In addition to the ones that we're all familiar with such as payment term modifications, accepting price increases and operational assistance (e.g., lean supplier development), there's a bunch that get into some less familiar tactics. These include buying material on behalf of suppliers. Consider how "financially strapped suppliers may be late paying their own suppliers, and as a result have trouble getting the materials needed to make the products they sell. In that case, a company may want to consider buying the raw materials or components a supplier needs directly, and then receive the appropriate discount on the finished product." Or in other cases, direct financial assistance in the form of loans can be the right strategy. In this case, "a company can consider extending a bridge loan to a troubled supplier, generally secured with some asset, such as equipment or real estate".
While all of the advice in the article is spot-on, perhaps the most important point I'll add is the importance of acting as quickly as possible and as early as possible. And to act quickly often requires spotting a supplier's need for assistance before they come to you. Because once they reach out -- just as GM and Chrysler reached out to the Feds -- it's often too late to do anything. And the money you do spend at that point is often extremely costly and delivers a very small chance of any payback. After all, you're usually not going to get a return from bailing out a supplier by offering life support. Best to catch the patient and check them into the hospital before it's too late to do anything but pay for the respirator and a feeding tube. To enable this type of early-stage intervention, it's critical to invest in supplier performance and risk monitoring solutions and processes. For without them, you'll be stuck calling the ambulance when it's too late.
- Jason Busch
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Look, I'm all about trying to help other people out in a time of trouble - the current economic situation included. But bailing out my suppliers, who have spent the better part of the last two decades trying to squeeze every single dollar out of me, simply isn't in the cards. But even if I was ignoring the vengeful angel on my shoulder, I would think twice about some of these tactics regardless.
First, the key economic reason to using a supplier is because the supplier should be able to deliver the supplied product/service more cost efficiently. If I have to buy components for them because they can't pay THEIR suppliers on time... well, that's not good.
Second, and the suggestion that drove me over the edge, is that I shouldn't have to renegotiate my contract because someone made a deal that they later find undesirable. This happens to buyers ALL THE TIME. They buy when their revenue is up... or have more customers... or when gas is cheaper (name your factor here), and then have to live with the same contract when business gets rough. Even the old telecom contracts with "business downturn" language were carefully crafted to only account for a specific percentage of downturn and only upon meeting other criteria. In other words, you should have ALREADY CONSIDERED what an economic slowdown would do to business - and how it would affect your contract.
Overall, the time to consider these types of potential issues is before signing the deal - not afterwards. And frankly, neither party should feel compelled to renegotiate because the other side didn't consider all the angles.