An initial assessment confirms that a supplier may be troubled, and now a plan must be put in place to mitigate the risks. What are the response options and recommended initiatives?
First steps should include financial and operational analysis of selected information to assess key business and financial risks for the troubled supplier’s ability to meet customer requirements:
- Analyze supplier’s organizational structure, including, but not limited to, its business units, operating plants and customers/programs
- Analyze supplier’s historical and forecast level of profitability and cash flow
- Understand capital structure, including analysis of collateral to understand changes in borrowing capacity/availability (if applicable)
- Understand supplier’s forecast of free cash flow relative to its working capital, capital spending and debt service requirements
Transparency and liquidity measures are key; establish a crisis management team
Having confirmed the level of risk through the assessment exercise, quick and decisive action is required to understand and stabilize the level of risk to your production system due to a distressed supplier. Understanding the liquidity status helps to identify available cash and determine what payments are due and when. It’s important to expand liquidity forecasts for at least 13 weeks (more ideally, 6 months) and develop cash scenarios that identify cash burn drivers and appropriate cash measure responses that facilitate worst-case scenario preparedness. And, if circumstances are dire, proactively assess the risks and benefits to the supplier’s use of bankruptcy protection options.
The immediate objective is to stop the bleeding and improve short-term results. Some quick response actions include identifying cost-cutting potentials, both direct (especially temps/labor) as well as in indirect areas and short-term contract cancellation options. Working capital optimization is another response tactic that provides immediate relief and stability through fast invoicing, receivables management, inventory reduction, modified payment terms and deferred purchases.
When facing a distressed situation, growth is not the priority; survival is. Capital expenditure initiatives must be scrutinized and followed by appropriate actions, including deferring non-critical investments, considering sale and leaseback, and divesting non-core assets.
Setting up a structured response framework is another critical action. Establish a dedicated crisis task force to carry out proactive communications with key stakeholders, both internal and external. This team will help mitigate a longer-term crisis by upholding response processes and initiatives, identifying staff risks, and considering regulatory and legal changes.
Three overall action items to consider
As the world continues its fight against the pandemic and pockets of the global economy show signs of resurgence, it’s clear that the commercial aerospace supply chain will face ongoing disruption in the near term. This will perhaps not be to the extent initially expected, yet enough to hamper an accelerated recovery for OEMs and larger suppliers, and threaten the survival of lower-tier companies. Consider these three action items:
1. Proactive supplier screening
Distress, whether market driven or self-inflicted, remains an ongoing risk for aerospace suppliers. It is imperative to invest in resources that facilitate early distress detection, proactive evaluation and due diligence best practices.
2. Rapid response
When at-risk scenarios are identified, act fast. Execute financial and operational analyses to evaluate the troubled supplier’s ability to meet customer requirements. Improve transparency and liquidity measures. Develop risk scenarios and plan for the worst case. Implement cost reduction programs and scrutinize capex initiatives.
3. Crisis management team
Manage the response with a dedicated crisis task force. A structured response will help avoid a longer-term crisis. Communication with stakeholders, both internal and external, is key.
Despite these challenges, it is the response and pace of that response to distress that will determine the ultimate outcome.