In September, Excel Storage Products abruptly ceased operations with no warning to its customers or employees. The move resulted in well-documented legal problems with its employees, and it also left certain customers in a bind. Distributors who had placed orders with the company were left to scramble to find other suppliers who could meet specifications on very tight deadlines, or else explain to end-users why they would be unable to meet agreed-upon delivery terms.
Such closings are, unfortunately, a part of business in a competitive industry. Particularly in a time of economic recession, financial problems are not uncommon. Still, though, it’s hard to not to be caught in a difficult position if a key vendor closes down without notice. What are some of the warning signs distributors can look for to avoid being put in an uncomfortable position?
2011 MHEDA Vice President Scott Hennie, vice president at Hy-Tek Material Handling (Columbus, OH), has been through a few such instances and offers some “red flags” that may signal that a supplier is in financial trouble.
- Changing payment terms. Suddenly asking for money up front—if that’s not standard practice for that particular manufacturer—could indicate cash flow problems. “If someone does not usually ask for upfront money, that should make you take pause,” Hennie says. Of course, he adds, it may just mean a change in business model, but you may want to ask a few questions.
- Changing project personnel. Typically if a salesperson sells a large project, he or she is probably not in a position to be let go. “In our case, the salesperson who sold the project was suddenly let go, which really triggered that something may have been wrong,” Hennie says. If a salesperson, project engineer or other key member of the company’s personnel is suddenly dismissed, that should cause concern. Hennie recalls, “At that point, I actually called the president of the company and asked him, point blank, if they were in financial trouble. He said they were not. I don’t think he was purposely lying, but about six weeks later, the company went out of business.”
- Changing company management. People leave jobs all the time, of course, but usually there is some indication or some other opportunity for them to move to. If a company executive is released with no apparent cause, then that could be a sign that they see the writing on the wall and the company may be closing soon. The higher-ranking the person is, the more likely it’s not a voluntary move.
Even if these red flags do appear, it doesn’t necessarily mean the company is going under or that there’s anything you can do about it if they do. “There’s no easy way to tell that a company is in trouble if they don’t want to tell you,” Hennie says. “But if you notice sudden changes in the way they do business, you ought to start probing a little bit.”
What kind of probing? Start by asking questions. A true partner won’t be afraid to tell you the truth. For instance, Hennie shared a story of one longtime supplier who suddenly asked if Hy-Tek would be willing to pay 25 percent of costs up front. “I asked if he was in financial trouble and he said no, he wanted some cash to get a better deal on steel before prices went up. He gave us a discount in return for upfront payment. I’m satisfied that that was a legitimate reason.”
Another measure to take is to implement a policy to verify suppliers’ credit information, much as you would for a customer. “It’s standard practice to ask customers as a way to help ensure we will get paid,” Hennie says. “If we use a vendor that we don’t regularly do business with, we ask them for credit references up front. We don’t want to get left in the lurch from either side.”
What do you think? How can you safeguard yourself from vendors going out of business?