Out-Law Analysis | 22 Jul 2020 | 9:05 am | 2 min. read
This is part of a series, find out more about how to manage supply chain distress in the manufacturing sector.
Being able to identify and evaluate the early warnings of supplier distress will enable businesses to manage uncertainty over supplier viability. It will be important to distinguish between businesses looking for allowances due to the short-term impact of Covid-19, and those looking for concessions because their financial distress has become severe.
Signs to look out for include:
In a multi-layered, interdependent and complex supply chain, there may be several avenues of distress - but when operating with limited time and resource, focus on those businesses that present the highest risk of exposure.
An experienced team should be appointed for each of the following steps.
Monitor the creditworthiness of suppliers in your supply chain.
Check stock or component levels. Assess those activities that are integral to your business operations and quantify your exposure.
Quickly get up to speed with the risk from both internal data – such as financial information, debt levels, inventory, inter-dependency of supply – and external data. Use this data to make a systematic assessment of the risk and any disproportionate reliance on certain suppliers.
Perform a contract review of the key terms and conditions of trading with distressed suppliers. In particular, identify approval, novation and termination procedures and any other contract levers. Reflect on the interconnectivity with cross-border suppliers. Categorise suppliers into low, medium and high priority.
Proactively engage with those critical businesses to get the measure of the true extent of the risk.
Formulate a contingency plan for continuing either with or without the supplier, including considering a supplier cull to reduce the number of vulnerable relationships and potential supply chain interruptions. Assess any risk of a lender exercising step-in rights. Re-establish ownership of tools, and assess the strength of any third party relationships.
Adopt strategies to increase resilience and protect against supply chain risk: changing payment terms; requiring pre-payment; considering a formal collaboration or acquisition to bring supply in house; dual or multi-sourcing supplies; seeking alternative tooling suppliers; bringing in interim management or professional turnaround specialists; exercising any audit or monitoring rights in full.
Consider funding outside of insolvency to mitigate financial cost and downtime associated with insolvency. Request prioritised security for emergency support or super priority funding for new moratorium as an option. Seek to protect production by insisting on separation of stock and components.
Consider demanding or enforcing enhanced rights of entry and inspection for audit purposes, or seek strengthened intellectual property rights in exchange for your continuing support.