I recently had the chance to catch up with my old friend and colleague, Jim Lawton. Jim runs the D&B supply management business unit and given his former role in front-line procurement at HP, he has a unique vantage point on the impact of supply risk on the business. Unfortunately, the discussion was not optimistic. According to Jim, "we're seeing real problems brewing as we go into 2009."
Frequent Spend Matters readers know the difference between Chapter 7 bankruptcies and Chapter 11. In Chapter 11, companies usually end up restructuring as the train continues to chug down the tracks. Supply disruption is often minimal, thanks in part to the debtor in possession (DIP) financing used to manage the restructuring period. Chapter 7, in contrast, results in liquidation. Don't pass go. Don't wait for your container. Don't expect to get your tooling back. Under Chapter 7, if you're waiting on supply, you've lost. And you had better have other alternatives in the chute.
So from a supply perspective, it's easy to see why Chapter 11 is preferred. If your supplier is going to go bankrupt, Chapter 11 is where you want them to end up. But according to Jim, "we are currently projecting that we will end 2008 with 35% more chapter 7 bankruptcies among suppliers than the same time last year". And adding insult to insolvent injury, "we are also seeing an increase in suppliers ceasing operations. For example, the suppliers we monitor in Automotive that ceased operations has increased 17.6% since June 30th."
Scary, you say, but I have no ties to the automotive supply chain. Well, you're still not safe, if D&B's numbers are to be believed. Jim also told me that within A&D, "we have seen a 41.4% increase in the number of normally very stable companies move into the moderate risk category." While I did not query Jim on other industries, you can be sure the picture is not pretty across heavy industry, retail, food, CPG, service-based and other industries especially prone to recession and/or commodity price volatility.
In this period of financial market bail-outs and the "not so big 3" domestic auto makers begging for Federal cash flow assistance, it's tragic that so many credit worthy 2nd tier producers can not secure DIP financing. We have F-mac and F-may guarantees for troubled credit worthy home mortgages. If responsible suppliers with a decades long responsible track record cannot find DIP financing, we have no business bailing-out any other industry.
Stay tuned for Part 2 of this post when I continue to share D&B information on how companies are delaying payments to suppliers -- both in the US and around the world -- in the current economic environment and what this means for supply risk.
- Jason Busch