It’s Up To Manufacturers to Keep Their Suppliers Afloat

It’s Up To Manufacturers to Keep Their Suppliers Afloat

by Tom Linton and Bindiya Vakil - April 14, 2020

In recent weeks, many governments around the world have created stimulus and relief programs to address the economic collapse caused by the Covid-19 pandemic. But they will be too little or arrive too late to save tens of thousands of suppliers. Their ultimate customers - major manufacturers - must come to their rescue. Some are already doing so. Others should follow their lead. It’s in their own best interest. This article offers ways they can help.

Suppliers across many industries have been devastated in the last two months as their customers have cut production or shut down entirely. In the automotive segment alone, 41 of the 44 auto assembly plants in the United States had closed by March 26, according to the Alliance for Automotive Innovation. Even well-capitalized global companies are struggling: Aptiv, one of the world’s largest automotive suppliers, announced that it would draw down its entire $1.4 billion credit facility.

In response to this crisis, some large manufacturers are taking steps to financially support the ecosystem of suppliers they depend on. BHP is accelerating payment of invoices. Vodafone announced it would pay European suppliers within 15 days. Lockheed Martin has said it will advance more than $50 million to small and medium-size enterprises (SMEs) in its supply chain.

While this pandemic is unprecedented, this kind of emergency supply chain financing is not. During the 2008-2009 financial crisis, companies such as LG, where one of us (Tom Linton) worked, and Cisco, whether the other (Bindiya Vakil) was employed, used loans, advance purchases, and other measures to keep imperiled suppliers afloat. Because the two firms stood by their key suppliers during their darkest hour, the suppliers paid them back with immeasurable loyalty and rewarded them in many ways during the recovery, such as giving them preferential treatment to meet their needs, notifying them early about looming supply issues, and offering them bigger discounts.

Here are some best practices that major manufacturers should now employ immediately:

Assess suppliers’ financial health.

Supply-chain managers and chief procurement officers should quickly assess the financial status of their key suppliers - including those two or three tiers down in the supply chain - and prioritize which of them to help. (For their part, suppliers in financial peril shouldn’t wait to be contacted; they should reach out to their biggest customers for a helping hand.)

Those direct suppliers that account for the largest amount of a major manufacturer’s direct expenditures (about 20% of suppliers generally represent 80% of total direct spending) are usually publicly traded and therefore must report material financial data. Since they are also the suppliers with whom original equipment manufacturers (OEMs) have the closest relationships, it’s pretty easy for OEMs to have frank conversations with their key executives. Therefore, assessing their financial health is relatively straightforward.

A mix of public and privately held companies compose the rest of the supply base, with the latter typically accounting for the majority. Since privately held firms are not required to disclose financial information, OEMs should monitor them closely and try to get them to share information about their conditions. Some OEMs employ in-house tools to collect and analyze financial disclosures of public suppliers and use Rapid Ratings or other providers of financial health ratings to monitor private companies.

Rank suppliers by their impact on revenues.

To prioritize which suppliers to aid, an OEM should focus on how their loss, or disappearance, would affect its revenues and the effort that would be needed to replace that supplier. This assessment should include those in tiers below Tier 1 - even those that provide prosaic items such as packaging, sheet metal, and hardware. If a supplier of an inexpensive specialized cable that is essential to producing a top-earning product goes under, that loss will disproportionately impact the company’s top line, particularly if an alternate source cannot be quickly found and scaled up.

Pick your support option.

Once the critical suppliers are identified in this way, the following recommendations can be helpful to support those that are financially struggling:

• Suppliers that account for a large amount of expenditures. Place orders now, far in advance, for meeting future demand (possibly several years’ worth) so these suppliers can borrow against committed receivables.
• Suppliers that account for a medium amount of expenditures. Pay them upfront or on delivery; place orders now for meeting future demand; or consider taking a minority equity stake in them.
• Suppliers that account for a low amount of expenditures. Extend them a loan, give them money or raw materials with no strings attached, pay them upfront or early, or, where possible, relax service-level agreements that may be expensive for the supplier to meet.

Supply chains are interdependent ecosystems. Thousands of small suppliers feed mid-sized suppliers, which, in turn, feed large global corporations. The current crisis is a dire threat to these ecosystems. Large global corporations should act now to prevent them from collapsing. Their own long-term success - and perhaps even their own survival - is also at stake.

Tom Linton is a senior adviser to Flex, an electronics manufacturer, and Resilinc, a provider of supply-chain-mapping services and risk-monitoring data. He previously served as chief procurement officer of Flex, LG Electronics, Agere Systems, and Freescale Semiconductor.

Bindiya Vakil is CEO and founder of Resilinc, a provider of supply-chain-mapping services and risk-monitoring data. She is a founding member of the Global Supply Chain Resiliency Council and sits on the Advisory Board of the MIT Center for Transportation and Logistics.