When a supplier files for bankruptcy, it can trigger a cascade of challenges for your company’s operations, finances, and reputation. Navigating this situation requires a strategic and proactive approach to help mitigate risks and maintain business continuity. Here’s a guide on what steps your company should take in response:
Assess the Impact
Quickly evaluate the impact a supplier’s bankruptcy filing may have on your operations. Determine the criticality of the supplier’s products or services to your business and identify any immediate disruptions or potential long-term consequences. Consider ordering additional safety stock from the supplier, both assisting the supplier through increased sales and providing downside supply protection.
Communicate Internally & Externally
Transparent and timely communication is key. Inform relevant internal stakeholders about the situation, including procurement, finance, and operations teams. Ensure they understand the potential implications and are prepared to take necessary actions. Externally, communicate with customers and partners who may be impacted by supply chain disruptions, providing updates and reassurances where possible.
Evaluate Alternatives
Explore alternative sources of supply to mitigate the impact of the supplier’s bankruptcy. Assess existing relationships with other suppliers and investigate new vendors that can fulfill your company’s needs. Consider diversifying your supplier base to reduce dependence on any single entity.
Review Court Filings, Contracts, & Legal Obligations
Review contracts and agreements with the bankrupt supplier to understand your rights and obligations. Evaluate termination clauses, delivery schedules, and potential liabilities. Consult with legal counsel to explore options for protecting your company’s interests and recovering any outstanding payments or deposits.
Gather information from the court filings to understand the supplier’s intentions and whether they will continue to operate, close, or sell. The filings also will provide a better understanding of the supplier’s access to use of cash, liquidity, and/or borrowings.
Quantify Financial Exposure
Assess the financial impact of the supplier’s bankruptcy on your company. Calculate outstanding payments, deposits, and prepaid orders that may be at risk, as well as any consignment inventory, tooling, or similar property in possession of the debtor. Consider filing a proof of claim in the bankruptcy proceeding to protect or recover property or debts owed to your company. In bankruptcy, a proof of claim is a formal document submitted by a party to the case asserting a claim against the debtor. This claim must detail the amount owed and the basis for the debt, such as a loan agreement or unpaid services. Creditors must file these claims within a specified deadline set by the bankruptcy court. Claims are reviewed to determine their validity and accuracy. Ultimately, approved claims are prioritized for repayment according to bankruptcy law and the available assets of the debtor.
Strengthen Risk Management Practices
Enhance risk management practices to better anticipate and mitigate supply chain disruptions in the future. Regularly assess supplier financial health, monitor market conditions, and develop contingency plans for managing similar situations. Consider establishing frequent calls or meetings with the debtor to discuss both the status of the case and your delivery or production needs. Further, evaluate whether it is appropriate to have someone present on location to monitor production or processes that impact your needs.
Innovate & Adapt
Use the disruption caused by the supplier’s bankruptcy as an opportunity to innovate and improve your company’s supply chain resilience. Explore technological solutions, process improvements, and alternative sourcing strategies that can enhance agility and competitiveness in the long term.
How Can We Help?
Our restructuring and turnaround team can help clients see their challenges through different perspectives—and move with momentum through complex situations. Our cross-functional team, rooted in deep industry and subject matter knowledge, strives to understand your organization’s challenges. We work in collaboration with you toward achieving resolution. From a complete business restructuring plan to helping with critical business negotiations, we aim to deliver tailored services designed to help drive impact and change and restore stability and confidence for constituents.
If you have any questions or need assistance, please reach out to one of our restructuring and turnaround professionals.