Digital
Article
Crisis Management
It’s Up To
Manufacturers to
Keep Their Suppliers
Afloat
by Tom Linton and Bindiya Vakil
For the exclusive use of O. Almodovar, 2023.
This document is authorized for use only by Omar Almodovar in MGT 5290-01 Fall 2023 Session I taught by Jason Williams, High Point University from Aug 2023 to Nov 2023.
set
off
It’s Up To Manufacturers to
Keep Their Suppliers Afloat
by Tom Linton and Bindiya Vakil
Published on HBR.org / April 14, 2020 / Reprint H05K9W
gerenme/Getty Images
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. But they will be too little or arrive too late to save
tens of thousands of suppliers. Their ultimate customers — major
manufacturers — must come to their rescue. Some are already doing so.
Others should follow their lead. It’s in their own best interest. This article
o!ers ways they can help.
Suppliers across many industries have been devastated in the last two
months as their customers have cut production or shut down entirely. In
HBR / Digital Article / It’s Up To Manufacturers to Keep Their Suppliers Afloat
Copyright © 2020 Harvard Business School Publishing Corporation. All rights reserved. 1
For the exclusive use of O. Almodovar, 2023.
This document is authorized for use only by Omar Almodovar in MGT 5290-01 Fall 2023 Session I taught by Jason Williams, High Point University from Aug 2023 to Nov 2023.
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. 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 response to this crisis, some large manufacturers are taking steps to
financially support the ecosystem of suppliers they depend on. BHP is
accelerating payment of invoices. Vodafone announced it would pay
European suppliers within 15 days. Lockheed Martin has said it will
advance more than $50 million to small and medium-size enterprises
(SMEs) in its supply chain.
While this pandemic is unprecedented, this kind of emergency supply
chain financing is not. 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. 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 o!ering
them bigger discounts.
Here are some best practices that major manufacturers should now employ
immediately:
Assess suppliers’ financial health.
Supply-chain managers and chief procurement o”cers 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. (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.)
HBR / Digital Article / It’s Up To Manufacturers to Keep Their Suppliers Afloat
Copyright © 2020 Harvard Business School Publishing Corporation. All rights reserved. 2
For the exclusive use of O. Almodovar, 2023.
This document is authorized for use only by Omar Almodovar in MGT 5290-01 Fall 2023 Session I taught by Jason Williams, High Point University from Aug 2023 to Nov 2023.
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. 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. Therefore, assessing their financial health is
relatively straightforward.
A mix of public and privately held companies compose the rest of the
supply base, with the latter typically accounting for the majority. 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. 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.
Rank suppliers by their impact on revenues.
To prioritize which suppliers to aid, an OEM should focus on how their
loss, or disappearance, would a!ect its revenues and the e!ort that would
be needed to replace that supplier. This assessment should include those in
tiers below Tier 1 — even those that provide prosaic items such as
packaging, sheet metal, and hardware. 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.
Pick your support option.
Once the critical suppliers are identified in this way, the following
recommendations can be helpful to support those that are financially
struggling:
• Suppliers that account for a large amount of expenditures. Place
orders now, far in advance, for meeting future demand (possibly several
HBR / Digital Article / It’s Up To Manufacturers to Keep Their Suppliers Afloat
Copyright © 2020 Harvard Business School Publishing Corporation. All rights reserved. 3
For the exclusive use of O. Almodovar, 2023.
This document is authorized for use only by Omar Almodovar in MGT 5290-01 Fall 2023 Session I taught by Jason Williams, High Point University from Aug 2023 to Nov 2023.
years’ worth) so these suppliers can borrow against committed
receivables.
• Suppliers that account for a medium amount of expenditures. Pay
them upfront or on delivery; place orders now for meeting future
demand; or consider taking a minority equity stake in them.
• Suppliers that account for a low amount of expenditures. Extend
them a loan, give them money or raw materials with no strings attached,
pay them upfront or early, or, where possible, relax service-level
agreements that may be expensive for the supplier to meet.
Supply chains are interdependent ecosystems. Thousands of small
suppliers feed mid-sized suppliers, which, in turn, feed large global
corporations. The current crisis is a dire threat to these ecosystems. Large
global corporations should act now to prevent them from collapsing. Their
own long-term success — and perhaps even their own survival — is also at
stake.
Tom Linton is a senior advisor at McKinsey & Company and an
independent director of and advisor to other companies. He previously
served as chief procurement and supply chain o”cer of Flex and held
similar positions at LG Electronics, Agere Systems, and Freescale
Semiconductor.
Bindiya Vakil is CEO and founder of Resilinc, a provider of supply-
chain-mapping services and risk-monitoring data. She is a founding
member of the Global Supply Chain Resiliency Council and sits on the
Advisory Board of the MIT Center for Transportation and Logistics.
HBR / Digital Article / It’s Up To Manufacturers to Keep Their Suppliers Afloat
Copyright © 2020 Harvard Business School Publishing Corporation. All rights reserved. 4
For the exclusive use of O. Almodovar, 2023.
This document is authorized for use only by Omar Almodovar in MGT 5290-01 Fall 2023 Session I taught by Jason Williams, High Point University from Aug 2023 to Nov 2023.
to
Place this order or similar order and get an amazing discount. USE Discount code “GET20” for 20% discount
