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March 23, 2009 02:00 AM

In downturn, keep eye on links in supply chain

Don Loepp
Editor
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    Forget about molding quality parts, retaining the best workers and buying resin at the best possible price.

    That's business as usual.

    These days, plastics processors and suppliers are dealing with a much bigger challenge — dealing with companies in their supply chain that are in financial trouble.

    A pair of lawyers spoke at the Plastics News Executive Forum, held March 2-4 in Summerlin, about how to minimize supply-chain disruptions caused by the recession and collapse of Wall Street lending.

    The pair emphasized that old-fashioned communication often is key.

    “You have to be proactive in all aspects in this marketplace in dealing with customers, dealing with suppliers, dealing with your lender,” said William Kohn, a partner with Cleveland law firm Benesch Friedlander Coplan & Aronoff LP. “Be proactive and have a better likelihood of a good result.”

    Deborah Thorne, with Barnes & Thornburg LLP in Chicago, added that personal attention to your banker or other lenders can pay off, even in a climate where few of the lenders are actually making loans.

    “Lenders don't really have that much to do in this marketplace. They are not able to make a lot of loans. But I think Will's point about having this connection with your lender and meeting with them regularly is really important. Because I have seen lenders in this market go to bat for borrowers, because there has been a good line of communication,” said Thorne, who made her presentation via a conference call.

    “So putting aside legal and financial things, it still in a lot of ways comes down to a personal relationship,” Thorne said.

    Because of the nature of supply chains today, many companies can be vulnerable to weak firms in their supply chain. Trends toward just-in-time delivery and sole-source supply have made purchasing more efficient. But now risk is multiplied if a key link in the chain goes out of business or files for Chapter 11.

    How can you tell if a supplier is in financial trouble, before they end up in Chapter 11? Kohn suggested a few red flags: If they delay or make partial shipments, request expedited payments, or experience quality issues, those could all be clues that the company is in financial trouble.

    Thorne added: “Also, use your sales people as the eyes and ears of your corporation as well. Because they often see things before someone who is in-house sees them.”

    How should you handle a supplier that's in financial trouble? Kohn offered five tips:

    * Find out where your tooling is, and who owns it.

    * Prepare to find alternate sourcing for key suppliers. Start a relationship, test their quality.

    * Determine if you can pass pricing hikes on to customers.

    * Inspect delivered goods more carefully.

    * Meet with the supplier to discuss their financial picture.

    But suppliers are not the only potential trouble spot. Customers in financial trouble can be just as dangerous.

    Again, Kohn offered some typical red flags: a customer requesting extended terms, delaying payments, raising quality issues to support a delay in payment that are later dropped or not supported, or decreasing its order level.

    A large increase in orders also can be a sign of trouble — the customer could be stockpiling in preparation for a Chapter 11 filing.

    Kohn and Thorne also had advice for attendees on how to deal with lenders. Some keys: plan in advance, and communicate.

    “One of the things we tried to do last year is warn clients that if you have a loan coming due in the next six to 12 months, you might want to start negotiations early on some of those financings, because we saw a tightening of the credit market,” Kohn said.

    Now that credit is tight, firms should continue to look for opportunities to grow. But that might mean finding a new lender.

    “Of course if you are looking for opportunities to expand in this down market, some of your competitors may be on the block,” Kohn said. “You have to decide and determine that your lender has an appetite in this industry to want to even see you grow in a responsible manner.

    “There's such negativism out in the marketplace that even where there are good opportunities to increase market share, you may not get the support of your lender,” he said.

    Options might include checking with regional or local lenders that have a good feel for your company and your market.

    Kohn suggested meeting regularly with your loan officer to talk about how you view your customers and the health of your supply base.

    Thorne warned that many banks may be suffering from a lack of experienced loan officers and workout teams, especially senior people who have experience from previous recessions.

    “One of the things that I think all of the banks have a problem with right now is that they have very few experienced work-out [teams], or anybody who's had experience in a troubled market,” she said. “Most people aren't as old as we are who are there, and don't remember earlier downturns. So the banks are operating with a deficit in that area.”

    What happens if a key customer goes into Chapter 11? Thorne had plenty of advice, including one that most companies commonly ignore — volunteer to serve on the creditors' committee.

    “An awful lot of vendors decline to be on a committee. And I just can't emphasize enough how important it is for real trade vendors to be on committees, because they're real business people with real experience,” Thorne said.

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