A Sourcing Innovation Prediction for 2013, Part III

Will it be the supplier's fault that your company might be one of the companies filing for bankruptcy this year? After all, the supplier didn't communicate any issues as per their contract, leaving you to find out about your predicament only after they went belly up and your order didn't arrive. The CEO and CFO might paint that picture when the time comes, but is it the right one?

Let's examine the various learnings from the future conversation, heard through the chance occurrence of a number of temporary simultaneous wormholes through the multi-verse that just happened to align in the right formation to carry a conversation from the future to our ears in the present (as we all know wormholes can't violate the asymmetry of time within any universe with asymmetrical time, such as ours). We learned the following facts:

  1. the company had no back-up supplier
  2. the only available supplier the company can find on short notice does not have the right production equipment because the company designed a product that required a specialized piece of production equipment that has to be custom, hand, manufactured and requires a rare earth metal
  3. they have less than 2 months of cash reserves, despite a plan to have at least 6 and an expectation of 8 months of cash reserve by the CEO
  4. the company delayed as many payments as possible for at least six-months to manipulate the numbers at year end; when they released most of the delayed payments, 15% of the reserves were slashed
  5. the company delayed settlement of a class action lawsuit as they thought the delay would minimize their losses, but the legal bills came in at three times the expected rate
  6. the company tackled a big-bang IT ERP and dependent-system upgrade which overran project costs by 50% before costing the organization millions in unexpected up-front renewal charges
  7. the company voted themselves big bonuses that ate up almost two months of cash reserve

I don't know about you, but this sounds pretty damning. Let's consider each point:

  1. no back up supplier for a critical product the company was banking it's future on; there should at least have been a back-up supplier identified even if the product was to be sole-sourced
  2. designing a product that could only be produced by a specialized production line, of which there was only one; you should always have one back-up
  3. poor working capital planning, as they apparently had no back-up plan for an unexpected recession; you don't need to have cash in the bank, but you at least need to have credit lined up to cover the maximum expected disruption
  4. extremely poor working capital management as every $10 of payments delayed costs an organization at least $1 in the end; this is just dumb
  5. the company played legal games instead of just owning up to their error(s) and getting it over with; this is also dumb (maybe there'd be a few more claims, but it's likely the claims would not have exceeded the ridiculous legal bills by trying to avoid your responsibility for too long)
  6. the company bit-off a big-bang project, knowing that most big-bang projects end with a big bang; this is very dumb (just because you replace your ERP, doesn't mean you have to replace your ERP driven systems: you just have to create an interface for them with appropriate middle-ware)
  7. knowing that cash was tight in the previous year, and knowing that numbers had to be manipulated to look good, the company still voted themselves big bonuses; dumb, dA, duMB, dUMB, DUMB!

Yes, it's damning. But was it enough to blame the failure (entirely) on the company? Let's consider the points again:

  1. This was entirely their fault.
  2. This was ultimately their fault, but they may have been (mis)led by the supplier.
  3. This was their fault, but if you really think you have more cash than you need, you are allowed the luxury to direct your attention to other issues as there just aren't enough working hours in the day to constantly monitor every issue.
  4. This was entirely their fault.
  5. This was ultimately their fault, but they were likely misled by the outside council who knew, full well, that minimizing the company's consumer liability would likely maximize the company's liability to the council's law firm.
  6. This was ultimately their fault, but they are a manufacturing organization, and they were probably misled by the outsourcing vendor who said that the safest way to go was to replace all of their ERP dependent systems instead of writing middleware (as the vendor, likely a Big 6, wanted to maximize its bottom line).
  7. This was entirely their doing, but when you consider the prevailing winds, you can't hold them at fault since every company does it and at least this company restricted their excessive bonuses to what they thought was the cash available after minimum reserves were accounted for.

In short, everything was ultimately the company's fault, but three decisions were probably heavily influenced by greedy external providers who did everything they could to lead the company down the chosen path under the veil of good advice. And one issue was not necessarily one the CEO should have been focussing on with the mis-information he was given.

But, and this is the kicker, the CEO was right in that if the supplier had not gone bankrupt and shut-down before delivering the company's order for the quarter, the company would be doing just fine.

So where do we lay the blame? The dodgy supplier that ultimately put the company into bankruptcy? The supplier and the company, as both made mistakes and both likely played a part? Or the company, as it was ultimately the company's responsibility to manage their operations and cash, monitor their supply chain proactively, and prevent disruptions that could bankrupt them?

The answer is that the blame lies entirely with ...

 

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