Lessons Learned From Failing Suppliers — Republic Windows and Doors: RIP

In the scheme of the number of supplier failures, Republic Windows and Doors is not that important. It's a small, Chicago-based manufacturer with union-member employees that used to make, well, just what its name suggests in an undifferentiated manner. According to one commentator from the local Chicago media peanut gallery, the company was doomed to fail. "The unions may have something to do with it, but Republic as a whole is a terrible company," writes one observer. "From its non distinguishable product lines, to the slow lead times, to the terrible customer service (Always a horrible experience ordering from them). I feel bad for the employees, but glad this sorry company is finally falling apart."

It's a sad story, especially for the workers, but the situation is one that we should all pay attention to. And not just for the sit-in that Jesse Jackson and other publicity seekers pursued with the former employees. The reason why we should all pay attention to the news is that Republic Windows and Doors is one of the many borderline companies having its credit life line yanked away by banks. Regardless of the reason that Bank of America decided to tighten the credit noose on Republic Windows and Doors, it's important to understand the type of suppliers that banks are most likely going to target. Many will have a number of things in common.

First, banks will take an especially hard look at reducing or eliminating credit facilities for suppliers that are clearly, from a revenue standpoint, at risk of collapse. What might signal this risk? Revenue concentration in rapidly falling industries like construction and automotive are dead giveaways. Also, industries that have been hit by commodity price volatility before the downswing but were unable to pass along all of the price increases to their customers (AKA: you) are likely to have weaker balance sheets entering this downturn than many others.

Second, small and medium-sized closely held businesses where a small group of shareholders run the show are at greater risk thanks to the challenge of raising additional funds. Given that owner 401Ks are looking as bare as many pre-cut Christmas trees, they won't be raiding the retirement account anytime soon to recapitalize a failing investment. I know of one company earlier this year in the technology space that is actually having an excellent year, but had their credit facility yanked at the start of the credit crunch resulting in the need to cut a material portion of its workforce to survive a short-term revenue trough. Survive they did -- thrive is a better word -- but the bank still thought they were risky due to their size, industry and closely held ownership.

Third, banks will look at the relative cost advantages and disadvantages of whom they're lending to. Regardless of whether or not you think organized labor is a good thing for society, unions almost always add cost into the labor equation (to support their infrastructure and management, if not for any other reason). In other words, small and medium-sized suppliers with union labor that costs an above-market rate -- especially if they meet any of the previously mentioned conditions/criteria -- are in the target zone for banks looking to reduce or cut a credit facility.

For procurement and supply chain organizations, what's the net/net of this? You should use similar criteria to banks in evaluating the relative risk of your supply base. And don't sit around waiting for the inevitable. Either switch out your spend before a supplier goes under or work to actively develop key, strategic suppliers and offer them terms to help keep them afloat as banks cut back. But either way, know which ones are most at risk.

- Jason Busch

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