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Dealing with Troubled Suppliers

ISM's 87th Annual International Supply Management Conference

San Francisco, CA
May 2002


Roberta J. Duffy

Although no one wants it to happen, sooner or later, it's likely that most supply managers will find themselves dealing with a supplier that might be dropping in performance, having financial troubles, or have other internal issues.

Jeffrey J. Mayer, Esq., and Michael O'Shaughnessy, Esq., from Freeborn & Peters, and attorney Mark A. Aiello from Foley Lardner, gave some insights into this delicate but necessary topic in one of the Monday afternoon sessions. They discussed:

  • How to identify when a supplier is in trouble
  • What types of formal communications should take place
  • Advanced issues concerning e-commerce and international trade

As is the case with many issues that could have legal implications, it's always best to consult with counsel on the specifics of your situation, but here are some highlights from the segment about recognizing a distress supplier. There are some early warning signs that supply managers should watch for.

Missed, late, or short shipments or low-quality shipments. The key here is to recognize when this becomes a trend. Isolated incidents may not be a concern, but if a trend begins to develop, it could mean that the supplier is having trouble obtaining materials or their production or labor is experiencing troubles.

Unprofitable operations. If financial information about your supplier is not publicly available, then you might want to consider establishing this criteria (that they share information) in your initial contracts. Two more warning signs (that ultimately lead to unprofitable operations) are: increase in labor expenses and expedited shipping. Both of these can have a correlation to sub-quality work that needs to be re-worked or replaced.

Stretched payable or calls from second-tier suppliers. This is when your supplier's supplier contacts you directly, in hopes of at least enlightening you to the fact that the supplier is not timely on payments. In extreme cases, this could lead to "garnishment" meaning that payments you make to your immediate supplier could be garnished to pay the second-tier supplier.

Employee turnover. This specifically refers to "key" employees that might be exiting the company. Losing customers. Again, this is significant if it develops as a trend as opposed to isolated incidents.

This is just a sampling of the presentation, that then went on to discuss remedies and options available to the supply manager. For more information, see the presentation from this informative session.

By Roberta J. Duffy, editor of Inside Supply Management

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