Hide-and-seek

You can learn a lot about vendors and customers by getting employees to pay attention to a few important details
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Will your company survive?" the vendor asked as soon as we'd ordered lunch. His question surprised me. Yes, we were having problems, but I didn't know the word was out. How did this guy find out?

"What do you mean?" I asked.

"Look," he said, "my drivers talk with your warehouse people daily; they know those people better than you do. And they see the inside of dozens of warehouses each week. They can recognize problems with shipments,inventory, and quality without hearing a word.

"And my receivables clerks talk with your payables clerks all the time; that's a negative sign right there, no matter what my people learn from those talks. My salespeople visit your offices every week or two -- they can see what's happening. And I talk with many of your customers and vendors, who have their own concerns about your company.

"What I mean is, I know a lot more about your company than you might think. Are you going to survive?"

The company did survive, although the outcome was in doubt for a while. But during those tough times, I was continually amazed at how informed some customers and vendors were about our problems, and how blind others were to them. Finally, I started to watch for the signs in our company that the smart businesses were reading, signs that could warn me in the future about problems other companies might be having. If you make it a point to put your employees on the alert for these same signals -- from your salespeople to accounting clerks to delivery people -- you'll be able to save your company a lot of time, trouble, and expense.

* Delayed payments

No surprise here. If your customer delays payments long enough, you'll begin to question its financial stability.

I used to deceive myself at times, though, when I had to delay payment. If I offered excuses for slow payment -- my computer's down, say, or we lost an invoice -- I thought our vendors wouldn't catch on to our miserable financial condition. The smart ones weren't fooled a bit.

* Invoices paid out of order

Say your customer owes you for two invoices, one for $300, which is 30 days old, and another for $4,000, which is 40 days old. Because your customer will want to keep you happy even though it's short of cash, it may pay the $300 first.

Anybody who's ever been drowning in red ink knows that paying the smaller invoice seems very reasonable at the time. The hope is that the vendor won't notice you haven't paid the older invoice.

* Complaints

Working in a troubled company is like swimming with piranhas. Employees never have time to solve one problem because so many others keep nibbling away at them. The chances are good, therefore that if you make a mistake when you ship or bill to a troubled company, it isn't going to respond as a healthy customer would.

If your error is minor, the troubled company may take weeks to respond -- often it waits because it's got more pressing problems to deal with. (Sometimes the "problem" it finds will be imaginary, merely an excuse not to pay the bill.) If your error is a serious one, the troubled company's own crisis atmosphere can make employees overreact to the mistake. They might even threaten to sue you, hoping a judicial jackpot might rescue the company financially.

* Requests for special payment terms

To improve cash flow, a company in trouble will try to collect early and pay late.

Our vendors knew all about our late payments, and many of our customers learned about our early collections as well. "Here's the plan," we told certain customers. "We'll offer you a 5% discount if we can ship COD, and even more if you'll prepay your orders." When they heard our terms, of course, our customers didn't have to be geniuses to figure out that we were desperate for cash. Think about it: assume that the 5% discount gave us cash one month early. This translates into an effective annual interest rate of roughly 60% for what was, for practical purposes, a 30-day loan. Theoretically, of course, that discount made no financial sense. But with no bank willing to talk with us, and payroll coming up, we didn't have much choice -- and our customers knew it.

* Early shipments

When goods you've ordered to arrive on a certain date come early, that can be a sign of a vendor in trouble.

When we found our sales slow, cash tight, and a juicy order scheduled to ship in three weeks, we thought, why wait? I found that some well-run companies will refuse the shipment, returning it with freight due for the round-trip. Others accepted delivery but scheduled payment based on their requested delivery dates. One customer even charged us a warehouse fee to store our early shipment.

* Employees leaving

You'll probably notice when a company's top officers start to find other employment. But in my experience, the exodus of a large number of middle managers can provide you with earlier and more detailed clues about a company's problems.

In the company I've been describing, our middle managers knew almost as much about our problems as the officers. But because they were lower paid than the officers, they faced a greater personal risk from a business failure. Since they owned little or not stock, they also had less incentive to ride out the bad times, and therefore tended to leave for more secure jobs earlier on.

And because these former middle managers were more willing to talk about the company than were former officers, they provided our customers and vendors with more detailed information about our problems. (You do have to keep this information in perspective, however. In our case, at least, the information was distorted because the middle managers were better informed about our problems than our solutions. For instance, they saw that we couldn't pay our bills on time, that our inventory was piling up, and that our margins were low; but top management hadn't told them about the new loan agreements and sales contracts we were working on, or about the favorable effect our increasing volume would have on our margins.)

* Reaction of visitors

Your delivery people can learn a lot.

Our loading docks provided a clear view of the warehouse and the manufacturing area, where inventory problems were obvious. Goods returned from customers -- easily recognized by the returned-material authorization numbers on them -- often sat for hours by the loading dock, awaiting disposition. The floor near our loading dock often accumulated boxes with informative paperwork taped to the top -- such as "return to vendor for rework," "scrap," "not what we ordered." And our warehouse workers talked regularly with delivery people.

Of course, your purchasing and salespeople who talk daily to vendors and customers, often in their plants,can easily learn much about the health and direction of the companies you are dealing with.

Our employees worked in a crisis atmosphere, acting depressed, cynical, and angry in turn. Salespeople pressed too hard, trying to meet impossible quotas. Accounts-payable clerks and supervisors spent their days answering phone calls, promising that we'd pay "real soon." Purchasing spent more time canceling orders than planning new ones. And everyone had a ready excuse for every failure.

* Credit rating

If you're smart, you'll watch the credit ratings of your major vendors to be sure you're dealing with healthy companies. When a vendor folds, after all, you could lose weeks of production while looking for a new supplier -- and for some products, you might not find a replacement. And because underpricing is a frequent cause of failure, your new vendors may well charge more than their predecessors.

Last updated: Jul 1, 1988




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