Keeping an Eye on Risk: Vendor Bankruptcy

In January 2020, commercial bankruptcy filings jumped up compared to January 2019. Commercial Chapter 11 filings, in particular, saw a big jump over last year. How are your vendors doing?

In 2019, overall bankruptcy filings increased only slightly over 2018. Filings are still way below the number of filings at the peak of the Great Recession, but who wants to use that as the benchmark? If it is one of your vendors that suddenly files next month, you won’t care what happened in 2010.

The performance of your suppliers is critical to your organization. So too is the financial condition of your vendors. The state of their financial health represents an area of risk to your operations, and those in purchasing and specifically vendor management need to keep abreast of the financial health of your suppliers, along with product quality and timeliness of delivery.

Of course, keeping an eye on vendor risk of bankruptcy is much easier said than done. Vendors that are public companies have financial reporting obligations, though those financial reports typically put the best face on things. Companies tend not to divulge things like credit constraints and poor cash flow to their customers.

Buyers have limited control over their vendor’s circumstances, though paying on time is one significant thing an organization can do to positively impact a vendor. What else can be done? Stay alert. Pay attention to what’s going on in the markets that might affect a particular vendor. Purchasing should have a checklist of best supply practices, addressing such areas as balancing supply consolidation for leverage and dependability with sufficient diversity to ameliorate risk. Avoid over-dependence. Know your vendors—which are new or small businesses? They require closer monitoring.

Maintaining good supplier relationships is strategic in this way: if a supplier goes out on you, good relations with others will make replacing lost supply easier than otherwise, and possibly without much or any interruption in service to your customers.

Track the news and consider subscribing to a data service that reports on suppliers’ financial issues. Communicate regularly and establish trust in supplier relationships. Trust will facilitate candor. If there are performance issues, or if something seems amiss, have a frank conversation with the supplier. Include a review of its financial condition.

Again, pay on time. Every business depends on getting timely payments (including yours).

Nearly every company has ups and downs. Good vendor relations can help companies and further strengthen relationships; they can also serve to alert you when there is something you need to know, as well as position you favorably with replacement suppliers.