Deborah R WilsonI can’t seem to get Dr. Robert Handfield’s recent, astonishing Wall Street Journal out of my head. In “United They Stand,” Handfield argues that buying companies should proactively help critical suppliers avoid financial failure. He argues that the traditional response of “standing by while your supplier fail” or even causing further damage by pushing for price reductions or extended payment terms when a supplier is foundering – are the wrong responses.
Conceptually, I couldn’t agree more with Handfield. In practice, I think his advice is deeply flawed. A few thoughts:
- Many if not most companies simply do not have the funds available to provide financial assistance to suppliers. If you have a choice between keeping your own folks employed and your supplier’s employed – well this is probably not going to be a tough decision.
- Many troubled suppliers simply require too much assistance for any one customer or even group of customers to get them on their feet again. I’m sure AIG was a key supplier to many financial services companies – but I never heard a customer bail-out even considered.
- Some of the most vulnerable suppliers are those that populate a severely troubled industry. We all know that tier-1 auto parts suppliers are facing great difficulty because of the dramatic decline in car sales. When an entire industry of suppliers is in trouble – well – how can the buyer help them all?
- Last but not least, a supplier that has systematic issues achieving profitability isn’t the best candidate for a “strategic supplier” anyway. Buyers have a duty to screen prospective strategic suppliers for financial viability – and those that don’t pass the test should be passed over in favor of a less risky option. Without this approach, buyers needlessly expose their organizations to risk.
What do you think? Am I missing something here?
Category: Procurement Market Research Vendor Vulnerability Tags:
7 responses so far ↓
1 Ian Rowlands April 6, 2009 at 1:39 pm
I don’t know if you are “missing” something. And I need to point out that the comments that follow are personal, and don’t reflect any corporate position …
Dr. Handfield surely address an important issue. Companies need to manage the risk of failure of “key” suppliers. There is, perhaps, room for a considered process:
1) Evaluate suppliers, considering likelihood and impact of failure. Perhaps plot them on a risk matrix.
2) Be intentional about dealing with “at risk” suppliers. Actions might include replace, support, monitor, reduce dependence …
The current economic circumstances will change the relationship matrix for many companies — suppliers, customers, partners and competitors. The question to address is will you manage the process, or react to it?
2 Debbie Wilson April 6, 2009 at 1:51 pm
I agree with you Ian, without reservation. I guess what shocked me about Dr. Handfield’s article are statements like this: (in the “key points” box in the article: “Best Practice: Managers of supply chains need to reach out to criticial suppliers and work on strengthening their business, both to weather the crisis and increase profits for the future.”)
Thanks for your comments
3 Mike Kanze April 7, 2009 at 12:58 pm
Debbie,
As a regular WSJ reader, I, too, read Dr. Handfield’s article with great interest. Unlike you, I am not as troubled by his comments, since seasoned supply chain managers are generally smart enough to avoid or at least mitigate the concerns you raised.
Here are a couple of reasons why:
1. “Financial assistance” can come in many forms. Put another way, a customer can “shape” the assistance as accelerated payments, capital investment in supplier equipment specific to the customer’s requirements, or simply renegotiating a higher price – just to name a few. If a supplier “critical” to the customer – in other words, the customer risks business or product line failure without the supplier – both will be highly motivated to find a way to “shape” the money appropriate to the circumstances of each.
2. Some vendors should be allowed to die without intervention – call it “do not rescusitate.” So should some customers so stupid as to bet their continued existence on a troubled supplier. Like both you and Ian Rowlands imply above, the principle of “assurance of supply” means that the customer is also taking prudent steps to manage the risk of supplier failure.
Cheers!
Mike Kanze
Robert M. (Mike) Kanze, MBA
CPSM, C.P.M., A.P.P.
President
Cornerstone Services, Inc.
.
4 Debbie Wilson April 7, 2009 at 9:34 pm
Nicely put MIke, as usual. So I guess I’m thinking of the “help” as equity or a loan, but you’re right . . there are many other forms.
5 Gregg Barrett April 8, 2009 at 11:55 am
It’s all Risk Management and I think that in general persons in contracts, legal and procurement are really lacking in this regard. I noted a nice post on IACCM about this (http://www.iaccm.com/newsitem.php?id=1043).
In reading part of Rob Handfields note he mentions “…reach out to critical suppliers and work on strengthening their business, both to weather the crisis and increase profits for the future.” When he refers to “critical” suppliers I am guessing that these are suppliers that are vital to the functioning of the organization, that if they disappear or are their ability to meet supply commitments is impaired, that this will have a serious material impact on the buying / receiving organization. This would of course warrant taking all steps necessary to prevent failure, within reason of course.
It’s a case of the barn is on fire and we need to put it out. We can diagnose what caused the fire later and then ensure preventative measures are taken to ensure it does not happen again.
Clearly this does not apply to all suppliers – just those that are “critical”.
Contracts, Legal and Procurement need to see the bigger picture (there are many that do, but I am asserting that there is room for improvement and that there are many that don’t).
I shall part with words from Meredith Whitney which I think can serve as a maxim of sort for the community “Combining a unique approach of macro outlook, strategy, and company specific research” – Meredith Whitney Advisory Group, LLC
See the bigger picture, align it to strategy and get stuck into the little nitty gritty details, that is both quantitative and qualitative research.
Or maybe I set the barn alight while smoking my socks..?
6 Debbie Wilson April 8, 2009 at 12:03 pm
So what kind of socks do you have? (just kidding ; – ) ))
Your comments take me back to theory mode – though – does the buyer every really have a situation where one critical vendor needs help to survive – the buyer is in a situation to provide that help? I think the auto industry – where all the vendors need help – or a large company that dwarfs the buyer . . . . . .
7 Bob Ferrari April 21, 2009 at 8:37 pm
Debbie,
I respectfully disagree with some of the points you have outlined regarding Professor Handfield’s opinion piece. I have outlined some counter points in my Supply Chain Matters blog.
http://www.theferrarigroup.com/blog1/?p=602