Distressed sole supplier of packaging film
A food manufacturer's sole supplier of specialised packaging film is a family-owned firm with £12m turnover. The latest credit report shows late filings, an £85,000 county court judgment, and the loss of a customer representing 20% of revenue. The supplier provides 100% of film for a product line worth £18m annual revenue. No alternative is approved; qualifying a second source takes 16 weeks. Current stock covers three weeks. The contract has a 60-day termination clause for insolvency, no step-in rights, and no tooling ownership. Demand is 40,000 rolls a year at £2.10 a roll. The finance director wants to switch to a cheaper overseas supplier, but its samples have failed two quality tests. The operations director wants to increase buffer stock to 12 weeks. Working capital is tight; holding stock costs 18% a year.
1. Assess the probability and impact of supplier failure and calculate the financial exposure.
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Probability is high: late filings, a county court judgment and loss of 20% of revenue are classic distress signals, especially in a family-owned firm with limited access to finance. Impact is severe because the supplier is sole source for a product line worth £18m. Current stock covers three weeks; qualification of an alternative takes 16 weeks, leaving a potential gap of about 13 weeks. Weekly revenue at risk is £18m/52 ≈ £346,000, so a 13-week gap could put about £4.5m of revenue at risk, before expediting, premium freight and customer penalties.
The annual film spend is 40,000 × £2.10 = £84,000. That is small relative to the revenue at risk, which shows why price is not the main issue. The contract is weak: no step-in rights, no tooling ownership, and only a 60-day insolvency termination clause. On a risk matrix this is high probability/high impact. The risk should be recorded and owned at board level, not left with purchasing.
2. Recommend an immediate and medium-term mitigation plan, including contract improvements.
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Immediate: open a direct dialogue with the supplier's managing director; request weekly financial and capacity data; review the credit report; map the supplier's own critical suppliers; increase buffer stock from three to at least eight weeks while qualifying a second source. Eight weeks of demand is 40,000 × 8/52 ≈ 6,154 rolls, worth about £12,900 at £2.10; holding cost at 18% is about £2,300 a year. That is cheap insurance against a £4.5m revenue risk. Consider paying earlier or providing a short-term cash injection only with security and a clear exit.
Medium term: qualify the overseas supplier as a second source, but only after quality approval; audit its process and capacity; pilot a batch. Improve the contract with step-in rights, tooling ownership, access to drawings, a change-of-control clause, longer notice, and a right to audit. Develop a business continuity plan and identify a temporary import option. Do not rely on a single mitigation.
3. Advise the finance director on the cheaper overseas supplier.
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The cheaper supplier is not a like-for-like alternative. Two failed quality tests are a material warning in food packaging, where failure can affect product safety and lead to recalls. The finance director is comparing unit price, not total cost of failure. The overseas supplier should be treated as a potential second source, subject to a quality audit, sample testing, a trial batch and a 16-week qualification. The business should not switch the whole line to an unapproved supplier to save a small percentage of an £84,000 annual spend. Even a 10% price saving is £8,400 a year, trivial against the £18m revenue line. Use the overseas quote to benchmark the incumbent, but prioritise quality and continuity. If the incumbent fails, the overseas supplier may be the only option, so start qualification now.