Restructuring and Insolvency legal expert, and Partner at DMH Stallard, Frank Bouette’s last article focussed on seizing the opportunities economic challenges create. He now looks at minimising supply chain risks to help keep your business stable
In 2021, Made.com had an initial public offering (IPO) valuation of £775m. In 2022 it went into administration, citing supply chain issues as a major factor, and Next bought its business (primarily, the Made.com brand and intellectual property) for £3m.
The economic landscape is creating significant challenges. Increased costs, and reduced availability of materials and finance, combined with energy costs, currency fluctuations and labour shortages, are exposing financial weaknesses in supply chains. The risk of customer, or supplier, insolvency is real.
At the outset of a new trading relationship, early identification of those risks and monitoring them is key to resolving disruption, if insolvency arises in your supply chain. Key questions every business should be asking include:
• Who are your key customers and suppliers?
• If one fails, how would you replace that revenue or supply stream, and how would it affect your margins?
• Would any resulting disruption mean you breached related contractual agreements or banking covenants, and what would the impact be on your business and the rest of your supply chain?
Carrying out this analysis, and proper due diligence on supply chain relationships at the outset is critical to identifying and managing the risks. If possible, limiting your reliance on a particular supplier or customer, and identifying alternatives, also helps to reduce exposure.
Remember to conduct due diligence on key customers as you would key suppliers. Take care that the sales team’s desire to win customers doesn’t mean risks are overlooked. Simple things like credit checks, review of Companies House filings (including checking accounts and confirmation statements are up to date) and a web search on your counterparty may flag up early warnings.
Contractual protection should also be considered, including pre-payment or appropriate payment terms, credit limits (and monitoring them), requiring credit insurance to be in place, retention of title, obligations to provide up-
to-date financial data (which may include management accounts) and early insolvency exit and cross claim provisions.
During the trading relationship, undertake routine checks on key suppliers and customers. Look out for the following warnings:
• Delayed payments and stretching credit lines. Requests to re-negotiate payment terms and unusual requests for deposits or upfront payment;
• Chasing for payment or invoicing earlier than agreed. Spurious claims for payments, complaints, or reasons for non-payment;
• Deteriorating service or quality levels and delayed delivery;
• Late filing of accounts and confirmation statements at Companies House, extensions of accounting periods, a deterioration in and / or auditors’ qualifications in the accounts. These can be monitored for free at Companies House;
• New or additional security being registered to secure alternative funders or lenders of last resort,
and sudden unexpected resignations of and / or changes in directors. Again, these can be monitored for free at Companies House. Significant changes in management, losses of staff and communication silence are indicative of potential problems;
• Regular County Court Judgments or pending winding up proceedings. These can be flagged up via credit monitoring services; and
• Industry rumours or sector specific challenges. Maintain regular contact with key supply chain partners so you are alerted to and can assess the impact of issues early. Don’t undervalue the power of knowledge.
If you are concerned about a customer or supplier, early action is key and should / might include:
1 Check your contractual arrangements. Can you use them to mitigate your risk (e.g. cease supply or credit, withhold payment on account of potential damages claims, exercise retention of title rights or liens, trigger insolvency protection clauses, call on guarantees)?
2 Understand your obligations, and remember that if you supply an ‘essential service’ (including certain IT services) you may be legally obliged to continue supply if a customer goes into administration or liquidation regardless of the termination clauses in your contract – early assessment and action is key
3 Consider taking an inventory (or possession) of any retention of title stock held by the customer and take early action to recover overdue invoices. Reminding the directors of counterparties of their duties and potential personal liability for breach of them, coupled with the threat of enforcement action, all help apply pressure for payment.
4 If you decide, or need to, continue the relationship, consider renegotiating the terms to ensure you are protected, ensuring pricing reflects risk, requiring payment on account, third party guarantees or taking security. Would an assignment of debts down chain, or trust arrangements for funds flowing through the chain (if viable), protect your position? Also consider insisting on the provision of financial information by the counterparty to allow you to assess your exposure.
Supply chains are ever more complex and managing them is often a near full time task. The above is only a snapshot, and more tailored advice would help properly mitigate and manage risks. The expert team here at DMH Stallard are able to assist.
Frank Bouette is a Partner at DMH Stallard and is recognised as an expert in restructuring and insolvency law, who provides decisive practical solutions.
For further information on how to mitigate supply chain risk contact firstname.lastname@example.org