A Bad Day to be a Buyer

Jan. 19, 2017
A supplier's bankruptcy leads to a creative solution: Is it really stealing if you take back something that you actually paid for?

Hearing that one of your suppliers has filed for bankruptcy is a lot like walking into your office and seeing a film crew from “60 Minutes” waiting for you. You are usually both shaken and wondering “what will come of this?” In point of fact, an OEM buyer faces those same feelings when faced with a supplier bankruptcy. Why? Because if you don’t routinely carry a significant amount—months and months—of raw material safety stock, you will likely slow down your own production at your own company, something a purchasing professional never wants to be associated with.

You might think that this sort of thing should never sneak up on you. In other words, a bankruptcy should never be a surprise to a vigilant buyer. With public companies this is usually true since they are required to issue periodic reports which provide a clear window into their financial health. This type of transparency is not, however, available for companies that are privately held. With this category of supplier OEM buyers rely on developing a transparent relationship with their supplier’s management and/or ownership—something that can be difficult to do. Other than that, they must depend on their own observations and the word-on-the-street to monitor supplier viability. Consequently, since most small- to medium-sized OEM suppliers are privately held, there is an inherent sustainability risk involved in sourcing from them.

I had been a procurement engineer (translation: technical buyer) for about a year when one morning I received a call from a lawyer representing a bank. He said that he had been told by the owner of one of my suppliers that I was their contact with my company. I confirmed this, wondering where this was leading to. The lawyer then went on to say that the supplier company was in receivership and that his bank now owned all of its assets. I replied that I was sorry to hear this and asked if arrangements could be made to retrieve our tooling. He responded that this was exactly the purpose of his call and that we could take possession of our tooling for $200,000! I was a bit stunned by this offer and my subsequent answer was twofold, as follows:

• My employer had five tools located at that supplier and their initial cost had only been about $44,000.

• My company and the supplier had signed bailment agreements for each of these tools and this meant we already owned them. Consequently, the bank was misinformed in thinking that we had to buy back something we already owned.

I was feeling pretty confident about my position but then the lawyer’s tone of voice went from friendly to nasty. He told me that he was aware of the bailment agreements but regardless, his bank was prepared to go to court to contest our ownership claims. He went on to say that even if my employer eventually regained possession of the tools through legal means it probably would take six or eight months to do so. He ended by asking whether we were going to pay his bank the $200,000. I said I’d get back to him. After checking on the quantity of the bankrupt supplier’s raw material on-hand—it would only support a little over two weeks’ worth of production—I actually ran to my supervisor’s desk to ask for guidance.

My supervisor gave me the following guidance. His first words were, “How did you let this happen?” He went on to say that I needed to understand that it would “not be acceptable” for a lack of parts from this supplier to cause a production interruption. I shook my head “yes” not knowing what else to say or do. When I asked what actions he’d recommend he replied, “I’m sure you’ll figure it out.” The only thing I was sure of was that my hands were trembling and my face was probably a bit ashen. At that point he seemed to understand I would be flailing around a bit on how to proceed. A wry smile came to his face as he told me to “go and see Chuck,” but wouldn‘t elaborate beyond that.

Chuck was also a procurement engineer. His persona was that of both a balladeer and pirate. He had been in a performing quartet coming out of college and would always sing the same song at our department’s annual Christmas party—the theme song from “Man of La Mancha.” Chuck would ride his Hog to work whenever the weather accommodated him, and often dressed completely in black to emulate his hero—Johnny Cash.

I went over to Chuck’s desk and explained to him my situation. His first question was, “Where is this supplier located?” I replied they were local, only being a 90-minute drive or so from our factory. He then asked whether I knew where our tooling was stored in the supplier’s factory. I said I sure did, since in my buyer role I tried to make frequent visits to all of my local suppliers and as a result had a pretty good handle on their entire layout. Chuck then said, “Come over to my house after dinner and wear dark clothes.” I asked him what we were going to do. He just smiled and replied, “Take care of business.”

I rolled up to Chuck’s house just as the sun was going down. Chuck was in his F150—did I mention it was black in color?—and told me to get in and he’d tell me what our “mission” was. As he drove us down to the supplier he explained to me that we we’re going to do a bit of “ten-finger” shopping. When I asked him what he meant by this he smiled and remained silent. I too was silent for the rest of the drive.

When we got to the supplier’s main entrance all access seemed to be locked up. He asked if there were any entries other than what we could see up front. I said that there was a pedestrian gate around back that my contact at this supplier had used whenever he wanted to make an unobserved get-away from work, usually for an afternoon of golf. We drove around back and sure enough it still was there and better yet, it was unlocked. Chuck said, “Great, we won’t have to use the bolt cutter I have in the back of the truck,” and turned off the truck’s headlights. He told me we’d wait 15 minutes or so to make sure no one was around and then go in to retrieve the tooling. We did just that. The tools themselves weighed only a little over 100 pounds each on average so, with a little muscle power, we were able to lift them into an available shop cart and wheel them out to Chuck’s truck.

The next day I took Chuck’s truck with the tools over to another local supplier that produced parts from the same commodity grouping as the one who had just gone into receivership. He smiled when he saw me and what I had brought, immediately understanding “what was up,” i.e., I’m sure he had heard of his competitor’s bankruptcy “on the grapevine.” He looked over the tools and said there would be no problem fitting them up in his presses. I immediately gave him a verbal purchase order and within two weeks he had qualified his processes and was shipping us parts.

I then went back to the office and called the bank’s lawyer (I couldn’t do this on my way back because this was before the advent of cellphones). He asked if my company had decided to go ahead and pay the $200,000 in order to access the tooling. I admit that I lied to him. I told him that unbeknownst to me, I had found out that the tooling fabricator that we had originally bought the tools from always built two sets, just in case a customer broke a tool and needed an immediate back-up. And so in this case we had purchased the needed duplicate tools from him for the original cost, i.e., $44,000. I then said, “Keep the tools—they were getting worn anyway.” The lawyer was silent for a minute and then asked what was he supposed to do with them. I suggested his bank sell them for scrap since the steel in the five tools altogether probably was worth several hundred dollars. He ended by saying, “You know, that $200,000 price was just a starting point—we would have settled for $44,000.” I replied that he should be more upfront with the next company that he was trying to steal from and hung up.

This occurred in the late 1980s before the invention of inexpensive security cameras or cellphones with cameras. I knew the supplier hadn’t used security guards and suspected the bank wouldn’t use them either. We never heard back from the bank so I suspect they never figured out that our tools were missing. For them to believe my story told me that they understood very little about manufacturing and had just been trying to leverage my company for a quick dollar. When we didn’t flinch, they moved on to the next customer on the list.

Chuck and I didn’t get caught back then but with today’s technology I wouldn’t recommend anyone attempt such a caper today. Later I learned that although this type of thing probably wasn’t included in any company’s purchasing orientation, it was a regular practice in the event of a surprise supplier bankruptcy. I once told this story to a young colleague. He was horrified, asking, “Didn’t you worry about getting arrested?” He went on to say he couldn’t understand how I was willing to jeopardize both my career and my family’s future financial well-being just to support factory production targets. I suspect that most of the buyers today would feel exactly the same way as this young man.

Back then things were a bit different. We liked to think that if we got caught our employer would stand up for us and as a consequence we were extremely loyal to them. Bottom-line, when someone was trying to mess with our company we took it personally. I’ll admit, though, that I did get a lot of personal satisfaction both in keeping my factory’s production on schedule and sticking it to that bank and its lawyer.

My next article will describe another incident from my early buyer days. It will detail another thing that can cause a buyer to have a bad day.

Note: Through my recent series on Next Generation Lean I made several contacts with like-thinking highly experienced Lean Practitioners. One of them, William Gilbert, is summarizing his Lean conclusions in the Inside Lean blog. If you are interested in reading about Lean from a factory manager perspective I highly encourage you to check this out. I’d recommend reading it serially, from his first entry onwards.

About the Author

Paul Ericksen | Executive Level Consultant; IndustryWeek Supply Chain Advisor

Paul D. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers. At the second he was chief procurement officer. He then went on to head up a large multi-year supply chain flexibility initiative funded by the U.S. Department of Defense. He presently is an executive level consultant in both manufacturing and supply chain, counting Fortune 100 companies among his clientele. His articles on supply management issues have been published in Industrial Engineering, APICS, Purchasing Today, Target and other periodicals. 

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