the Doors Open
Is your company an effective client? Or are your purchasing practices
driving your suppliers out of business? By Tracy Dillon
It takes a village to open a new store or complete a remodel—not only staff from any departments within the retail organization itself, but also outside
manufacturers and suppliers of a wide
range of retail environments and services.
A new store or remodel requires all players on the “team” to do their part. So when
a fixture supplier for a retailer’s new stores
goes bankrupt unexpectedly, the consequences are severe for the retailer. Delayed
openings inevitably cost dollars and, in
some cases, ruin careers.
Ironically, the procurement department
of the retail organization can unknowingly
be the root cause of the bankruptcy of its
vendor. This happens more frequently than
many realize—and is obviously not in either
party’s best interest. And the situation
doesn’t seem to be improving, even though
the economy has slowly been recovering
since 2009—as attested by the surprise
closings of several high-profile industry
companies in the past few months.
WHY DOES THIS HAPPEN?
Every situation is different and has unique
elements, but for an example, let’s look at a
hypothetical large retail chain. This chain,
for safety (and to ensure they were getting
the lowest possible price), divided its fixture
orders among several vendors.
Eventually, a new fixture vendor is
added to the mix. This new vendor on the
“approved vendor” list sources fixtures
from a number of vendors in China. To
build volume with the client, the new vendor bids the business at a very low profit
margin. Over the course of a few years, the
“One of the reasons
don’t have cash
is that they’re
for their customers.”
—Paul Pinkus, McGladrey LLP
new vendor gains a growing percentage
of the retailer’s fixture business because of
the very low prices.
Pressured by the retailer, the existing vendors are also forced to reduce their
prices. The very low prices and nearly nonexistent profit margins mean there is no
room for error. But things run smoothly—
for a while. The approved vendors continue to build. Their lenders continue to
lend them working capital as their sales
increase. But the vendors are required to
hold a number of “extra stores-worth” of
products in inventory for the retailer. And
the low bidder continues to receive an ever-larger portion of the business.
Then, suddenly, something seemingly
small in this delicate balance goes wrong.
The low-bid vendor runs out of capital
because all of the company’s cash is tied up
in the inventory the company is holding for
the retailer. Because the company is unable
to pay its China suppliers, the Chinese
suppliers refuse to ship. The bank has new
and more stringent lending requirements
and won’t lend more working capital. The
approved vendor is quickly forced to close
SO WHAT WENT WRONG?
“Companies don’t fail because of losses—
they fail because they don’t have cash,” says
Paul Pinkus, partner and national director
of the In-Store Marketing and Store Design
Industry Services section of McGladrey
LLP. “And one of the reasons manufacturers don’t have cash is that they’re holding
inventory for their customers.” Margin,
Pinkus says, is only one piece of the equation, although it also plays a role.
Combine that with a long and slow economic recovery, increasingly difficult access
to bank credit for vendors, and the uncertainties of international sourcing—a few
unforeseen problems can cause problems
for a supplier company quickly and with
little notice. There are many ways a supplier may go out of business, including
liquidations, orderly sales for the benefit of
creditors, prearranged bankruptcies, and
bankruptcies. In some cases, companies
simply close their doors and disappear.
As one manufacturer noted, “All the
paperwork and forms in the world can’t
save a retailer in these types of cases.”