Contacting key suppliers is a second important task for the finance chief. While a first instinct might be to hide the company’s troubles, talking to vendors and ensuring their cooperation is critical, and it’s better for them to hear the news from the CFO than through the supply-chain grapevine. “People are afraid to let vendors know that they’re in a restructuring process, but everybody knows already,” says Sanginario. “It’s the elephant in the room.”
Sanginario adds that many companies wait too long to work out payment terms with their suppliers, and by the time they do, “the supply chain is closing down on them.” Suppliers may begin shipping materials late and the company’s plants can quickly become backlogged as a result. In a situation where working-capital management is of utmost importance, such a scenario quickly puts the company under serious pressure.
Calming the Waters
When Earley began the restructuring process at Foamex, he contacted the company’s suppliers right away. “There are only a handful of vendors that supply our chemicals, so making sure we could get credit from them was very, very important,” he says. CFOs should expect to spend a lot of time communicating with vendors, he adds. “Suppliers were calling me on a very regular basis for updates,” he recalls.
“Suppliers get very nervous,” says Spielberger. “You need to walk them through the restructuring process. A lot of them don’t really understand it.” In Pliant’s case, the company filed for bankruptcy and Spielberger was able to secure debtor-in-possession financing, which meant that, under the terms of the restructuring, suppliers would be paid before any other creditors. The news, understandably, had a calming effect. “We did not lose any suppliers throughout the entire process,” he says.
Sanginario also stresses the importance of ongoing, rather than one-time, communication with vendors. “A common mistake CFOs make is thinking that just because they’ve made payment deals, usually going on a C.O.D. plan and freezing old balances, the supply chain is okay,” he says. “A lot of times it’s not. Suppliers might accept the payment plan, but it doesn’t mean they’re happy.”
In retaliation, they may move a company to the bottom of their list, stretching out delivery lead times, or delivering products of lesser quality or higher price. Sanginario urges CFOs to regularly check in with front-line workers on these issues and take action — like seeking out other suppliers or carrying more inventory — to defend against them.
Earley also spoke with those on the other end of the supply chain — customers — to make sure they knew that their business would not be interrupted by Foamex’s troubles. In the process, he learned that one of the company’s largest customers was going through a restructuring of its own. He developed a good relationship with his fellow CFO and the two spoke often throughout the restructuring.
As a supplier to the auto industry, Foamex had plenty of company in its distress. “Two of our top five customers went through restructuring right after we emerged from bankruptcy,” says Earley. “The whole supply chain was getting restructured.” By speaking regularly with top executives at Foamex’s customers, Earley not only created a strong rapport with them but also gained a sense of how those companies were faring and whether any of their key accounts might disappear. Foamex was ultimately able to retain all of its major customers.