Are you monitoring key suppliers for signs of financial distress? 3 Questions to ask to help reduce the impact on your critical services

Many companies in the food and agriculture sector are dependent on contractors or suppliers to help their business run smoothly. Whether it be a provider of maintenance services needed to keep the manufacturing plant in working order or a logistics company needed to transport the necessary ingredients, these dependencies are vital to ensuring the company is able to keep manufacturing its product to meet demand.

Given the importance of these dependencies, companies at the top of the supply chain must take an active role in monitoring the financial position of their key suppliers to make sure, if necessary, action is taken before it is too late. Whilst every contract and circumstance must be considered individually, here are three important questions which we ask our clients when a key supplier is in financial distress:

  1. Do you want to terminate the Contract?

The contract may allow you to terminate the contract where the supplier is suffering an insolvency or financial distress event. However, termination may not always be the best option. For example, if the pool of suppliers able to provide the services is limited.  

If termination is not the desired outcome, the contract may include alternatives. For example, you may have the right to “step-in” and provide the services or it may grant the right to re-scope the supplier’s obligations by removing certain services.

  1. What contingency plans are in place?

The contract may contain obligations on the supplier to provide (and update throughout the contract term) business continuity plans to deal with interruption with key dependencies and exit plans to deal with transition to a replacement supplier. Companies should make sure that these plans are available, up to date and address their main concerns.

  1. Do you have everything you need?

Whilst a supplier may be obliged to assist with a transition, it has minimal incentive to do so following termination. Therefore, it is important to obtain all the information and equipment needed to continue providing the services before taking such action. For example:

  1. Is there any specific documentation or equipment required to continue to operate, such as the plant maintenance manuals? If so, then the company should identify where these are located and, if possible, obtain copies prior to termination.
  2. Does the supplier have suppliers or contractors of its own (e.g. is a hop and barley supplier growing these itself or is it obtaining the barley from another supplier)? If it does then the company should find out if it can contract with those suppliers directly should the supplier go into financial distress.

Conclusion

If a supplier is suffering financial distress, establishing what information and assets are required is vital to maintain continuity of service. If your supplier is in financial distress then we would be happy to provide advice on your options and the practical issues which you need to consider.

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