The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

« Warehouses of the future - What it takes to reach there? Part I | Main | Intellectual Property Infringement – One of the Top Supply Chain Risk »

Supplier Bankruptcy – A Real Risk during Recession

Recession is here. Slower demand, shrunk liquidity and increasing pressure on cost is here. Auto industry has suffered from severe decrease in the demand which has resulted into steep production cuts. Suppliers get paid 45 to 60 days after delivering parts, and this may cause a wave of failures in March and April, when the nearly total shutdown in U.S. auto production at the start of the year starts to hit their balance sheets hard. To other industries also, recession presents increased credit risk and a very real risk of supplier insolvency. In my opinion, supplier bankruptcy causes two different kind of risks.

The first and obvious risk due to supplier bankrupcy is Supply Chain Disruption. Based on the size and  dependency on the supplier, this risk has a potential of minor disruption to complete shut down. Having identified alternative suppliers for key components is one of the best way to mitigate this risk. Yet, getting new suppliers in the supply chain is not an easy tasks. It may take few months.

Another option is to involve a  bank/financer at a very early stage in the transaction. Companies can send the POs to the supplier simulataneously passing the information to the bank. Based on the account liquidity and supplier’s credit history, banks can qualify whether the supplier is fit enough to serve the future demand or not, thus, reducing the risk of disruption should the supplier go bankrupt. At the same time, information from the extended supply chain is leveraged by banks to offer trade finance to suppliers at various stages within the supply chain. This process mirrors the 'just-in-time' approach used by large corporates to optimize inventory holdings. The liquidity risk is substantially reduced given the visibility of information throughout the transaction. Regular reports from Banks / Credit Rating Agencies about your suppliers’ credit health are certainly worth during recession.

The second type of risk arises from supplier filing for Bankruptcy Protection. Under the US Bankruptcy Code, supplier may be allowed to delay the decision on the contract till the end of the case – which could last for weeks or months. It also prohibits company from terminating the contract and requires continuous receipt of goods/services and paying the supplier. Even if the Supplier Contract allows you to terminate it at anytime and without cause, or terminate it if supplier becomes insolvent, the clause is uneforceable under Bankruptcy Protection Code. 

How to mitigate such severe financial and legal risk? Regularly obtaining financial information of the supplier certainly helps. Ensure that you retain ownership and control of software, equipment, data, deliverables and work in progress and supplier owned items that are critical to your business. Insulate yourself from any legal claims from supplier’s subcontractors. Ensure that the supplier is prohibited from delegating his responsibility without your approval.

Tough times calls for tough measures! Understanding interwoven relationship of financial supply chain & product supply chain and controlling the risk emerging out of it should be the priority of organizations during recession. 



Supplier bankruptcy is always a huge risk and can happen at any stage of the business cycle. It's only that the case becomes even stronger during periods of recession. Automotive suppliers always get paid between 45-90 days and recession has really not altered payment periods. I really don't really see the need for statements to be sent to banks for assesing credit worthiness. There are people like D&B who do that for a cost and customers can make use of their service once in a while. But the irony lies in the fact that it should happen in the opposite direction when it comes to global automotive supply chain. Suppliers in emerging ecconomies should be wary of their customers for payments. Most of the suppliers in emerging markets maintain a healthy portfolio of clients and exports would not constitute more than 30% of revenues (Unless you are a export oriented unit). Local demand ensures that suppliers maintain a healthly balance sheet and it is customers like GM,Ford and Chrysler that automotive suppliers should be wary of.

Thanks for your comments. I agree, for the auto industry, the trend is reversed as Suppliers are more at a risk due to fallen demand at their customers' end. However, even before the crash crunch, due to rising pricing pressure, some of the Tier 2 suppliers (at least 40 of them as per MEMA report) filed for bankruptcy. Some of them were operating in more than one supply chain. Other industries too (Retail, Food..) are impacted with this phenomenon. Banks/ Financers have come up with solutions to provide extra net during recession, when focus is more on finance in supply chain - focusing more on supplier side!! D&B is also an option.. Your observation on the Auto industry is correct and the blog is trying to address the wider phenomenon across industries!

Another great way is to actually look into the supplier’s financial statements and find out where they stand. Look at important financial ratios like debt/equity, quick ratio and interest coverage. Look also at trends over the past few years.

For public companies you can get their financial data online. Private companies are a little more difficult to get financial information from...your only alternative is to ask. They should comply. After all, if you are going to entrust your supply chain to your supplier, the least they could do is assure you that they are financially viable. In my experience, over 50% of private companies are willing to provide financial information data without issue.

If supply chain professionals do not have the time or skills to complete supplier financial viability assessments they should ask their finance group for assistance or reach out to a third party assessment firm (for example: for support and guidance.

Did you know that in 2008, over 43,000 businesses filed for bankruptcy in the USA, that's a 53% increase over 2007. 2009, so far, is looking even worse.

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

Please key in the two words you see in the box to validate your identity as an authentic user and reduce spam.

Subscribe to this blog's feed

Follow us on

Blogger Profiles

Infosys on Twitter