Daily Archives: January 15, 2013

A Sourcing Innovation Prediction for 2013, Part II

Setting: It’s been two days. The CEO has been in constant meetings with Marketing, Sales, Supply Chain, and Public Relations to try and figure out if there’s any way to avoid crucifixation in the upcoming earning’s call as the product was supposed to enable the company to make the quarter’s numbers, even though it was only supposed to be out for the last month of the quarter, and the CFO has been in constant meetings with the overseas law firm, bank, and goverment trade contacts to try and figure out what happened. Worn and weary, the CEO walks into the CFO’s office at the end of a very long day just after the CFO gets off the phone with a very forlorn look on his face.

CEO: By the look on your face, I assume we just got some bad news?

CFO: Very bad news.

CEO: How bad?

CFO: This could ruin us bad!

CEO: It can’t possibly be that bad. We’ve had disruptions before, but we’ve always got through them. Our stock price has taken a beating once or twice, but it’s always bounced back.

CFO: I know, but this time … it’s … it’s different.

CEO: What happened?

CFO: It seems our supplier has went bankrupt?

CEO: So? This has happened before. Either we’ll work with whomever buys them or we’ll go with our second choice.

CFO: We can’t, in either case.

CEO: Why not?

CFO: They were immediately scooped up by their biggest competitor for pennies on the dollar – who immediately shut them down and started stripping the factory down for machines and parts to upgrade it’s other locations.

CEO: So we go with our second choice.

CFO: Our second choice, after losing the bid, signed with our biggest competitor and in exchange for an exclusive three year contract from that competitor agreed not to work with us.

CEO: Then we go with the supplier who bought our supplier’s factory.

CFO: They say they can’t keep up with their current customer’s demand and refuse to take any new business.

CEO: So we find a new supplier. What about the third possibility we reviewed. Couldn’t they take our business?

CFO: They’re more than willing.

CEO: Then get legal in here now and we’ll put together a proposal package and get it to them tomorrow.

CFO: It’s not that easy.

CEO: Why not? It’s what we did last time we were in this situation.

CFO: Yes, but last time it was a completely differet product line.

CEO: So?

CFO: So, this product line requires a specialized production process.

CEO: So, we lend them the money to buy the equipment they need and off we go.

CFO: In order to improve the quality while reducing the production time and production cost, our supplier installed a special machine just for us.

CEO: So, order another one.

CFO: This machine was custom built by Advanced Custom Engineering and was make-to-order and they made only one.

CEO: So, just have them make another.

CFO: It took them six months to assemble the first one as most of the work had to be done by hand.

CEO: So it should be faster this time.

CFO: They tell me that, due to the specialized nature of the work, there’s no way they can do it less than three months, even if they had the time or the materials. They are overbooked

CEO: Then pay them overtime.

CFO: and don’t have the raw materials in stock.

CEO: Then they can order them.

CFO: One of the metals they need is a rare earth from China, that is currently in great demand and they cant’ get any for at least a month.


CFO: at least four months to produce the machine, and least two weeks to ship it, and at least two more weeks to get it installed at a new supplier. Add training, ramp-up, and delivery time, it means we can’t get our product for six months!


CFO: Yes, six months!

CEO: But we can’t go without a new product for six months. Our sales and revenues are declining. You just told me that our profit margin for last quarter, even after extending amortization cycles and delaying payments was only 3%, instead of our usual 7%. My math isn’t as good as yours, but I bet we’d be looking at -7% this quarter without a new product, as per the projections I reviewed when I approved it last year. And it would be much, much worse next quarter.

CFO: Yes, in fact, based upon most recent data, the predictive analytics are projecting a 10% loss this quarter and a 30% loss next quarter without it.

CEO: Holy guacamole!

CFO: Yes, holy guacamole!

CEO: Well, we can do what my predecssor did and cut costs to the bone and live off our cash reserves. It will be tight

CFO: You don’t understand. We don’t have the cash reserves!

CEO: What do you mean? We’ve been slowly stockpiling cash for the last two years. We were supposed to have at least 6 months in the bank. After the scare we had six years ago when I was COO, I mandated we build up to a reserve just in case, and you told me at the beginning of last quarter we were projecting 8-9 months in the bank by the end of this quarter. What happened?

CFO: Well, three things. First of all, the big bonus we got approved at the last board meeting for ourselves for exceeding our financial targets in terms of revenues and cash reserves ate up over two months.

CEO: Over two months? I thought it would be one month, but no matter, that should have still left us 6 months.

CFO: It should have but …


CFO: But, it didn’t include some things.

CEO: Like?

CFO: Remember when you told me to delay as many payments as I could into this fiscal year mid-way through last fiscal year to make our numbers look better?

CEO: Yes … but

CFO: And remember how we delayed settlement of the class action lawsuit?

CEO: Yes … but

CFO: And remember that project to replace our ERP and all of our major ERP-driven systems simultaneously?

CEO: Yes … but

CFO: That ate up over two-thirds of our cash reserves. Maybe three quarters.

CEO: Two thirds?

CFO: Yes

CEO: But how?

CFO: Well, delaying payments and write-downs, which we ended up having to pay most of this quarter when some of our suppliers threatened to cut us off and when our auditor said fix-this or else, cost us almost 15% of the reserves.

CEO: That much? I didn’t think it was possible.

CFO: Well, if you’re smart enough with the books, like we are, it is, and it got us our number last year.

CEO: Okay, that’s still only a month or so. What about the other three-plus, as it sounds like you’re saying we only have, at most, two months of cash in the bank.

CFO: Well, the law-suit ate up another month.

CEO: But the settlement required people to come forward and claim their refund for faulty products. And since less than 10% were faulty, and most people don’t bother to seek refunds after years have passed, we expected that would cost us next to nothing. That’s why we chose it.

CFO: Yes, but the legal bills were way more than inside counsel led us to believe they’d be. Almost triple!

CEO: That’s highway robbery! We should sue?

CFO: I agree, but we’d spend that much again to win, and then, since they’re a law firm, they’d file appeals and counter-claims and delay us to the point where we’d still come out behind in the end. So we just have to take our loss and eat it and never use that greedy law firm again.

CEO: I agree, but how did a single IT project cost us two months of cash-reserves?

CFO: Remember the delays, and the 50% overruns IT reported that would be necessary to finish the project?

CEO: Yes, and 50% isn’t too bad considering some of the massive failures you read about every day in IT upgrade projects. In fact, it’s downright cheap in comparison. That couldn’t have cost us millions.

CFO: It didn’t, but …

CEO: But …

CFO: But we couldn’t roll over to the new systems until the project was sufficiently complete.

CEO: Yes, I know. But again, it couldn’t have cost us millions.

CFO: It didn’t, but as a result of the excessive delays, we didn’t finish before our current licence period ended.

CEO: And?

CFO: Our current provider had us by the balls. Somehow they knew we were planning to leave them, and they gave us three choices. Renew for three years, at full rates; shut their system down immediately; or get sued, with an immediate filing for an injuction preventing us from using their system. We couldn’t afford the legal battle. Shutting down would kill us. So we had to renew.

CEO: So, the standard deal we always get is 1/6th up front, 1/3 over the first year, 1/3 in year 2, and 1/3 in a year 3. No biggie. And once we switched, we could just stop paying. Not like we’d get sued at that point. Once they had close to half our money, it wouldn’t be worth it to them.

CFO: Yes, but, as I said, they had us by the balls and they knew it. They demanded 1/2, up front, in a wire, or they were going to do everything they could to shut us down. The operational losses would have far outweighted the costs, so we sucked it in and paid up. And it wasn’t a bad decision at the time. We hadn’t been hit by the legal bills yet and the revenue forecasts for this product on its own were looking so good we weren’t worried at all.

CEO: But now we have no product. At least not for six months from what you’re telling me, five if we’re really, really lucky.

CFO: Yes.

CEO: So this really could ruin us.

CFO: Yes.

CEO: But I still don’t understand, how did we get here? The lawsuit and IT issues were bad, but every big company in our space faces them at one time or another and all of out competitors survived. It must be the supplier’s fault! After all, we did a detailed due diligence a year ago. They were the third biggest in the region, the fourth biggest we could have conceivably tried to contract, growing fast, and they had a strong balance sheet. Even our bank gave them a good rating. They must have screwed up royally. That’s it. It’s all their fault and they’re taking us down with them! No wonder those cowards have been ducking us!

CFO: I guess so. I see no other explanation. I guess I better start preparing our bankruptcy filing. If we’re proactive enough about this, and get the filing through before our creditors start suing us for non-payment, and we do a massive layoff timed just right, we might make it through.

But is there no other explanation? Are the CEO and CFO right? Stay tuned for Part III for a more detailed explanation of why a variant of the preceding conversation between a CEO and a CFO will happen in more than one Global 3000 firm this year!