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Supplier Bankruptcy: How to Limit the Damages

The key is to mitigate the fallout, whether the supplier intends to close its doors or not functions tend to pay a 2% premium on average to resolve the issues caused by a supplier’s bankruptcy.

These are extra costs that can eat away at the savings Procurement is responsible for. So, in the event of a supplier bankruptcy, Procurement should act quickly to reduce losses.

If a supplier files for bankruptcy, procurement teams should start by assessing the company’s exposure to risk; it should then take the following steps:

  1. First, establish contact with the supplier to get the facts. Procurement should determine what information it requires ahead of the call, as these conversations can be emotional. Don’t overreach in this initial conversation: keep it brief and only discuss the facts of the bankruptcy proceedings.

  2. Next, put together a response team to mitigate the impact of the bankruptcy. Work together to diagnose the extent of the problem and come up with an estimate of potential time and resources required to address the issue. You’ll also need to keep other relevant business partners in the loop.

    If the supplier is closing its doors, the procurement team will also need to put together and deploy an asset recovery plan to make sure they get hold of any of their company’s assets (like intellectual property or equipment), or assets the company is interested in, before they’re sold to creditors. This might mean quickly sending someone with the authority to carry out checks for assets on the spot.

    If the supplier plans to remain open, Procurement will need to decide whether to stay with the supplier or switch. To make this decision, first consider whether you think the supplier can succeed in maintaining the business. Then, consider how difficult it would be to switch.

    If you think it might be possible to stay with the supplier but aren’t sure, choose from these three options:

    • If it would be difficult to switch, move a medium volume of business to an alternate supplier, so you’ll be ready to switch the rest if the need arises.

    • If it would be somewhat difficult to switch, start building buffer stock and put together a business case for switching.

    • If it would be easy to switch, warn the business of the danger, build buffer stock, and consider assisting the supplier. If you can reduce your dependence on this product or service, do so.

  3. If you determine that it is possible to stay with the supplier, consider switching a small volume of business to an alternate supplier to make sure the distressed vendor doesn’t take you for granted. If it would be difficult or somewhat difficult to switch, it might be best to stay with the supplier. Document the potential costs and discuss them with business partners.

  4. Finally, Procurement should complete the response strategy and convey the relevant information to stakeholders. Meet with the response team once a day in the early stages of implementation to verify that everything’s on track.

    Work with Legal to make sure you continue to meet your contractual obligations or regulatory implications. Hold a postmortem within two weeks of the resolution to capture any relevant lessons.

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