Viewpoint: Weak link in the chain

UK supply chain businesses are operating in a challenging environment. Rising fuel prices are set to squeeze margins further and, in our increasingly digital, connected world, more companies will be expected to meet consumer expectations for faster deliveries while maintaining quality.

With factors like these, it’s unsurprising that our own research recently found 85 per cent of senior supply chain professionals expected to see an increase in insolvencies among supply chain businesses in the next five years.

The impact of an insolvency isn’t just felt by those supply chain businesses who have had to shut-up shop, their partners can be heavily affected too. In fact, according to the Association of Business Recovery professionals, unsecured creditors receive an average of just one per cent of the debt owed to them if an insolvent partner undertakes a pre-pack sale. This rises to just three per cent if the company is sold as a going concern.

With this in mind, it’s essential that supply chain managers are able to spot the signs that their partners may be struggling. And with our report finding that just 69 per cent of respondents were confident they knew how to deal with the impact of insolvencies in their chain – and that only one third had experience of dealing with them in the past – they must also know how to manage the risk.

As a first step, it’s advisable that companies conduct thorough due diligence on any new partners from the outset. This can provide a benchmark against which future performance can be measured, enabling firms to quickly notice any worrying drops in standards.

But there are also a few specific warning signs to watch out for. For example, a supplier holding significantly less stock, or consistently making deliveries that are short or late, may be a sign they’re suffering from cashflow pressures.

Requests to change terms or conditions could also be a red flag. Asking for a reduction in quality standards may be an indication that a partner is making cost-saving cutbacks. Meanwhile, a demand that the ‘title of goods’ – which gives full ownership of the items being traded – not be transferred until one of your supplier’s sources receives payment could suggest pressure further down the chain.

Firms can apply contractual measures to help mitigate the impact of a partner’s insolvency. An insolvency termination clause ensures contractual obligations are severed when a partner up the chain becomes insolvent, meaning firms aren’t forced to take a loss by continuing to supply. Similarly, implementing an ‘all monies’ clause ensures that full ownership of goods is retained by a business until its customer pays.

In an environment where higher fuel costs and heightened customer expectations are expected to cause pressure, knowing the warning signs of financial difficulties among your partners and how to spot them will help supply chain managers position themselves to mitigate their impact if the worst should happen.

Author Natasha Atkinson (pictured above) is a partner with national law firm Weightmans, specialising in domestic and international insolvency work.