Our early alerts sound the signal horn of financial distress prediction, so you know what’s coming at you. We're seeing a 119% increase in warning signs of financial distress for suppliers this year, with 63% of all cases this year happening in March alone. So, how to deal with financial distress as the COVID-19 consequences linger?
#1 Raise questions about supplier health and force majeure
First, raise the question within your company regarding your supplier’s financial health and examine their short-term resiliency. If you suspect that suppliers may be struggling financially, or another event such as sub-tier insolvency could affect their ability to deliver, begin a thorough review of your contract. Seek legal guidance to find out the exact legal definition of force majeure, along with any natural disaster clause in the contract, is the first step. When you can manage financial distress, you can reduce your own financial stress.
#2 Evaluate who pays for financial distress costs
To claim force majeure, suppliers will usually have to show that they have exhausted all alternatives, such as shifting to manufacturing lines in a different location. Whether the claim is valid may also depend to the wording in the contract, or on whether the legal system follows civil law (such as China and the EU) or common law (the UK and US). While you are at it, check your force majeure insurance coverage as well.
# 3 Ask your supplier what actions they are taking
Ideally, your supplier has notified you at first signs of delivery delays or logistic bottlenecks. If not, initiate the conversation. Contact members of you supply network and find out their financial situation. Also try to determine whether any short-term difficulty endangers their long-term viability. Most important is whether they have a strategy to overcome financial distress. This can include a turnaround plan, temporary production stops, restructuring, renegotiation of loans, or exploring other liquidity options.
#4 Can you/do you want to provide support?
If you are dependent on a single supplier, you may feel you have no other immediate option than to support your partners and master the crisis together. Financial support can include paying their invoices faster, for example, which can avoid making their cash flow problems worse. Collaborate closely on making sure you both can ensure business continuity – and insist on transparency. Here you are well advised to investigate their sub-tier suppliers, to avoid surprises further down the line. Working to keep your tier 1 supplier solvent is no use if their suppliers are not able to deliver.
#5 Can you resource supply?
This better-late-than-never option is to identify alternative suppliers located in regions not affected yet, or that are recovering. Relying on single-source suppliers is like being aboard a cruise liner without lifeboats. Should your suppliers slowly sink towards bankruptcy, there is nothing heroic about going down with the ship.
#6 Can you manufacture yourself?
Enterprises rely on (sole) suppliers for a long list of reasons. In many cases, manufacturing certain parts yourself is not feasible. However, recent months have witnessed businesses revamping entire production lines to make personal protective equipment or medical devices, with accompanying shifts in sourcing and in staffing. As the coronavirus has caused huge disruptions in supply chains, it may be worth revisiting the idea.
And one more option that may keep your suppliers onboard in the current situations is to hang on in anticipation of emergency low-interest loans, stimulus packages and bailouts – by mid-April worth more than $8 trillion globally – that are being floated by governments trying to buoy up businesses and keep the global economy from sinking. If your supplier has sound turnaround plans and is in line for some support, they may be able to weather the storm.