The Ripple Effect of Supplier Bankruptcy: Broad and Deep

Spend Matters welcomes this guest post from Rose Kelly-Falls, senior vice president of supplier risk management at Rapid Ratings.

A critical 105-year-old automotive interior supplier filed for bankruptcy last week, making General Motors’ worst nightmare a reality. Clark-Cutler-McDermott (CCM), a Massachusetts-based GM supplier, makes approximately 175 parts for GM and relies on the automaker for more than 80% of its revenue. For any company, such a crucial partner’s bankruptcy would be challenging, but for a Fortune 500 company, it can be brand-defining.

Fortunately, GM has lined up companies to replace CCM, but it will still take time to requalify a new supplier. Had GM not been able to quickly secure tooling and finished parts from another supplier, the bankruptcy would’ve left massive cost implications, with losses likely ending up in the tens of millions. As the aftermath of CCM’s bankruptcy filing continues to unfold, we can learn lessons for managing critical suppliers.

1. Critical Suppliers Should be Treated as Such

Critical suppliers are considered critical for a reason. They aren’t interchangeable, meaning that the consequences of losing the relationship can be severe. Even if a supplier can be replaced, there’s no guarantee that a transition would be seamless, or cheap.

2. Understand Financial Health

The heart of GM’s challenge is grasping the financial stability of its key suppliers. The suppliers that you depend on most should be the most stable. Transparency of financial viability is crucial to ensure a strong and durable relationship.

3. Private Doesn’t Mean Opaque

When a company is private, obtaining its financial health information can be difficult, but not impossible. Just because a company isn’t publicly traded doesn’t mean that you should turn a blind eye to its financial health. Instead, your relationship with any private supplier must be more open, with a deeper level of communication.

4. The Conversation is Always Ongoing

Financial health is vulnerable to externalities. Therefore, it’s essential that you have a consistent and systematic way to monitor financial viability. Working with your suppliers to ensure constant collaboration and discussion is key to understanding how they can — or can’t — help your business succeed.

5. If a Supplier Cries for Help, Listen and Ask Questions

A supplier conversation is a two-way street, and the best way to understand what your supplier is facing is to listen and ask the right questions. If it’s in your best interest to continue a relationship with a supplier, then it’s also in your best interest to step in and help before it’s too late.

In a corporate climate that is increasingly hard to predict, choosing to be reactive rather than proactive when it comes to supplier risk management only limits potential solutions. In the case of GM and CCM, the 45-year relationship is too damaged to be salvaged now. All of this could’ve been prevented with a bit more communication, cooperation and compromise. Avoid the same fate by understanding the financial health of your suppliers.

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