![]() If a supplier of an inexpensive specialized cable that is essential to producing a top-earning product goes under, that loss will disproportionately impact the company’s top line, particularly if an alternate source cannot be quickly found and scaled up. ![]() This assessment should include those in tiers below Tier 1 - even those that provide prosaic items such as packaging, sheet metal, and hardware. To prioritize which suppliers to aid, an OEM should focus on how their loss, or disappearance, would affect its revenues and the effort that would be needed to replace that supplier. Rank suppliers by their impact on revenues. Some OEMs employ in-house tools to collect and analyze financial disclosures of public suppliers and use Rapid Ratings or other providers of financial health ratings to monitor private companies. ![]() Since privately held firms are not required to disclose financial information, OEMs should monitor them closely and try to get them to share information about their conditions. Therefore, assessing their financial health is relatively straightforward.Ī mix of public and privately held companies compose the rest of the supply base, with the latter typically accounting for the majority. Since they are also the suppliers with whom original equipment manufacturers (OEMs) have the closest relationships, it’s pretty easy for OEMs to have frank conversations with their key executives. Those direct suppliers that account for the largest amount of a major manufacturer’s direct expenditures (about 20% of suppliers generally represent 80% of total direct spending) are usually publicly traded and therefore must report material financial data. (For their part, suppliers in financial peril shouldn’t wait to be contacted they should reach out to their biggest customers for a helping hand.) Supply-chain managers and chief procurement officers should quickly assess the financial status of their key suppliers - including those two or three tiers down in the supply chain - and prioritize which of them to help. Here are some best practices that major manufacturers should now employ immediately: Assess suppliers’ financial health. Because the two firms stood by their key suppliers during their darkest hour, the suppliers paid them back with immeasurable loyalty and rewarded them in many ways during the recovery, such as giving them preferential treatment to meet their needs, notifying them early about looming supply issues, and offering them bigger discounts. During the 2008-2009 financial crisis, companies such as LG, where one of us (Tom Linton) worked, and Cisco, whether the other (Bindiya Vakil) was employed, used loans, advance purchases, and other measures to keep imperiled suppliers afloat. While this pandemic is unprecedented, this kind of emergency supply chain financing is not. Lockheed Martin has said it will advance more than $50 million to small and medium-size enterprises (SMEs) in its supply chain. Vodafone announced it would pay European suppliers within 15 days. In response to this crisis, some large manufacturers are taking steps to financially support the ecosystem of suppliers they depend on. Even well-capitalized global companies are struggling: Aptiv, one of the world’s largest automotive suppliers, announced that it would draw down its entire $1.4 billion credit facility. ![]() In the automotive segment alone, 41 of the 44 auto assembly plants in the United States had closed by March 26, according to the Alliance for Automotive Innovation. Suppliers across many industries have been devastated in the last two months as their customers have cut production or shut down entirely. Their ultimate customers - major manufacturers - must come to their rescue. But they will be too little or arrive too late to save tens of thousands of suppliers. In recent weeks, many governments around the world have created stimulus and relief programs to address the economic collapse caused by the Covid-19 pandemic. To get all of HBR’s content delivered to your inbox, sign up for the Daily Alert newsletter. In these difficult times, we’ve made a number of our coronavirus articles free for all readers. ![]()
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