One of the most significant challenges in managing a company through a restructuring, whether in or outside of chapter 11, is ensuring that critical vendors continue to provide goods and services to the company. Attempts to maintain strong vendor relationships are often undertaken in the face of vendors’ fears of their own financial losses in the event of a bankruptcy filing and concerns of “throwing good money after bad.”
When a company is determining how to best deal with its vendors, it is useful to group them into three broad categories: key vendors (may be large or small), large vendors with a sophisticated understanding of the bankruptcy process and small vendors who have had little exposure to bankruptcy. In addition, a fourth group may be foreign vendors. There may be overlap among these categories, but based on the nature of the vendor and its importance to the ongoing viability of the company, grouping vendors into these categories and developing a cohesive strategy for each group will increase the chances of success.
Success in managing vendors through a difficult restructuring can be defined at the most basic level by the continued, timely shipment of goods with reasonable credit terms. No matter the category of vendor, honesty, communication and tenacity are key to building and maintaining ongoing vendor relationships.
When working with key vendors, including those that provide much-needed commodities or specialty components, the relationship will require a personal touch and is relationship- driven. For large vendors, their decision-making process is usually more bureaucratic, involving a number of different individuals resulting in limited flexibility. Small vendors, on the other hand, will likely have an owner who may be the sole decision-maker, who may also feel a personal impact of any financial losses. For foreign vendors, the cultural differences, norms and communication issues caused by a different language and time zones will increase the complexity and amount of time needed for negotiations.
Once the different types and categories of vendors have been determined, it is important to work with various departments within a company, such as sales, purchasing and treasury, to perform an in-depth analysis of expected future demand for the vendor’s product and the impact of this demand on the supply chain, specifically as it relates to key vendors. As the higher-priority, key vendors are evaluated, carefully consider potential high-impact liquidity opportunities such as which vendors provide the best trade terms and how to focus more spend toward those vendors as well as any unusual or special terms or conditions previously extended to the vendor.
Furthermore, carefully consider the leverage points that the vendor has over the company, and vice versa. Determine whether a vendor is a sole-source provider of a specialized product or service where there is a limited ability to re-source due to technology, manufacturing processes, capacity or other factors. With such vendors, the leverage is with the vendor. For multi-source vendors, the leverage lies with the company because an opportunity exists to re-source or to a certain degree, enhance existing terms. For noncritical vendors, re-sourcing can be accomplished easily. Sole-source vendors require hands-on relationship management; multi- source and non-critical vendors can be more forcefully engaged.
Once the vendors are evaluated and it is understood what leverage they have, it is important to determine addressable spending (the amount of purchases with a vendor that can be realistically targeted for improvement) and develop a goal for credit enhancement. This goal can often be measured in days payable outstanding improvement or in favorable cost variances in cost of goods sold on the income statement. This metric must also be easily calculated and should be a sustainable measurement to track success and instill accountability.
The next step in implementing a successful vendor strategy is to design a cohesive plan for working and communicating with the vendors. With this plan, it is possible to determine which vendors should be approached and how. In particular, isolate sole-source vendors for a more tailored approach and prioritize efforts across all vendors in order to achieve the maximum results in the shortest amount of time.
For distressed companies, including those undergoing a restructuring, a limited, finite amount of capital may be available for payments to vendors. It is critical to know how much and when those funds will be available. In addition, it may be that the availability of those funds is contingent upon events not entirely in the company’s control. To ensure your credibility with vendors, prior to making a commitment to a vendor about when a payment can be made, understand the risks and temper your commitment accordingly.
Prior to communicating with any vendors, it is very important to develop the key points for your message. Your credibility in this situation is paramount and you may need to overcome less-than-truthful comments or low credibility due to missed commitments previously made by other company personnel. In order to improve terms (or not have terms tightened or diminished), a vendor must believe that the company is viable and has a long-term strategy. Regardless of the strength of a company’s workout plan, if the message is delivered by a source lacking credibility, the plan will lack credibility.
In order to demonstrate that the company plan is indeed feasible, be prepared to show evidence of both short- and long-term viability. If a plan is lacking in either, a vendor will not provide product or extend terms. For key vendors, it is important to identify milestones and maintain an open dialogue. You want to avoid only communicating with critical vendors when product needs to be shipped. More frequent and honest dialogue with vendors builds trust and credibility.
It is very important to control the communications with the vendor. Only designated individuals should be authorized to negotiate with a vendor with clearly identified internal approval levels needed for final decisions. Make sure that key decision-makers within the company as well as those communicating with vendors clearly understand what is going to be said to vendors. Craft talking points for personnel involved in the communication process. A structured strategy allows you to control the message.
Engage the vendor and be proactive in the communications, and be persistent. For the most essential vendors, a combination of verbal and written communication including face-to-face meetings is critical. For less critical vendors, telephone, email and letters are appropriate. Keep in mind that any written communication, regardless of how informal, should be carefully considered as to any commitments.
A vendor will inevitably reject your proposal, not engage in negotiations, place shipments on hold or otherwise not cooperate with your objectives. If this happens, make sure that you continue to work to maintain this vendor long-term and that the vendor understands that supporting the company now will provide them long-term opportunities as well. Also remind them of the profitability that the company as a customer provides to their organization. Negotiating is extremely important and you do not want to damage a relationship even if a vendor is threatening to never ship product again. Approach negotiations from the perspective that a ”no” does not mean no—it just means “not now.” Attempt to make the vendor feel like they are a partner in the business and its long-term viability.
When contemplating how to deal with vendors in a distressed company, it is important to remember three things: Vendors are a very eclectic mix of companies in size and financial sophistication; certain vendors are going to be much more critical to a company’s survival than others, clearly identifying and understanding those differences early on is key; and credible and regular communication are critical.