A Supplier Bankruptcy Checklist

If you're a regular Spend Matters reader, I'd like to think that you're more sophisticated and open to new ideas than most in the procurement and supply chain sector. But even if you count yourself as open minded, you've probably not yet invested in a supply risk monitoring system designed to help predict potential supplier bankruptcies. A small minority of companies have, in fact, done so. While it's not too late, I suspect that if you've not invested in a system that looks at your entire supply base, there's a better than even chance you'll be dealing with a supplier bankruptcy in the coming months. To help preclude this looming specter, I suggest taking the following ten steps:

1) Develop a closer relationship with your suppliers that will allow you to sense that something is amiss before it's announced. Also, read between the lines of what they're telling you.

2) For strategic categories or those that are more difficult to switch out, consider developing an alternative supply list as a contingency -- even if you have no intent of using it unless you need to go to a plan B.

3) Aggressively monitor supplier performance (e.g., quality, on-time delivery, etc.). Performance related signals are often the most telling before a bankruptcy.

4) Network -- socially network if you can -- with others in similar category sourcing roles to pick up any dirt you can on the supply base.

5) Go on site visits -- with little notice. See how busy your suppliers look and talk to others besides the sales manager or account executive.

6) Put in place a rapid switchover process that you can execute more quickly than a regular supplier changeover and ramp-up period. Know what corners you can cut and those you can't before you need to use this process.

7) Consider holding additional inventory for categories with the most at-risk suppliers (e.g., those with ties to the automotive industry).

8) Approach at risk suppliers and renegotiate terms to provide more flexible early payment discount options and other contract elements that improve the order-to-cash lifecycle.

9) Consider 60/20/20 or 80/10/10 splits of business (or a similar model). Not only have Toyota and Honda learned that this sourcing approach can create more competition while improving supplier relationships -- it also creates a natural insurance policy.

10) As a last ditch effort, consider making strategic investments in suppliers that are simply too important to lose should they go out of business.

And one final suggestion. Buy supply risk insurance. That is, if Marsh is still offering it.

- Jason Busch

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