Over the past week, Sourcing Innovation has revealed its big prediction for 2013. In particular, it predicted that a variant of the conversation detailed in Parts I and II between a CEO and a CFO will happen in more than one Global 3000 firm this year. What was the jist of that conversation?

In Part I, we found out that upon his return from a luxury vacation, a CEO discovered, in his first conversation with the CFO, that the sales on the new product line were zero … because the product never arrived! The new distribution deal with Automated Crossdock Co — negotiated to take the goods direct from the manufacturer’s warehouse to the retail stores — turned out to be worthless as the supplier refused the trucks entry. When the CFO tried to find out why, he was continually given the runaround. And, at least three weeks after product was supposed to hit the shelves, there’s no product in sight.

In Part II, we find out that after repeated calls to the overseas law firm, the CFO finds out that the supplier has gone bankrupt. At first, the CEO thought this would be no big deal, as demand could just be shifted to the next supplier on the list, but this wasn’t the case because the product required a special machine to produce, that only the supplier had. And while another machine could be ordered, it would take about 6 months to custom build, ship, and install at a new supplier location. So it turns out to be a very big deal because, not only is the product line essentially shelved, but the company could end up filing for bankruptcy as sales on existing product lines had declined to the point where the company was losing money. And, despite expectations to the contrary, thanks to a lawsuit settlement, a severe IT upgrade cost overrun, and big management bonus, the company doesn’t have the cash reserves to last six months. As a result, the CFO is already starting to prepare for a bankruptcy filing as they see a proactive planning as their only chance of survival.

In Part III, we reviewed the learnings from parts I and II to try and discern if the company’s predicament was really the supplier’s fault, as indicated by the CEO, or if it was the company’s fault. We reviewed the seven major learnings and determined that, on their own and together, the facts were pretty damning against the company. But we concluded that, despite all of the company’s failings, which were numerous, had the supplier not failed to deliver the product before going bankrupt, the company would have survived. So who was to blame?

In Part IV, we offered you more insights into the situation by giving you a piece of the conversation that took place between the supplier’s CEO and CFO weeks before and a piece of another conversation that took place between the CEO and the CFO that took place months before. And then … we said you had to wait for part V for the answer.

In Part V we gave you the answer. The blame lied entirely with … to the delight of the Grinch … the company! Why? Re-read the entire series to understand!

The blame rests solely with the company and all companies who believe that payment terms of 200 days are reasonable! Governments should not only go to war over this atrocity, but should fine and criminally charge anyone who purposely delays payment to suppliers just to make the quarter / year end numbers look rosier! It’s one thing if the company doesn’t have money in the bank and can’t borrow at better terms than the supplier, and the supplier knows this up front but agrees to late payment in exchange for a greater margin knowing that the demand is there and the company will pay as soon as the customer does. But this isn’t the case.

Right now, most companies have money in the bank. Lots of it. Last year US-based Mega Corporations were hoarding $1.73 Trillion in cash! That’s roughly 12% of US GDP! And even if they didn’t have cash in the bank, there was still plenty of cash to borrow from the US banks that were sitting on $1.50 Trillion of excess cash reserves! (Source: The Guardian) In other words, the mega-corporations and big banks alone are sitting on a cash stock-pile that is 25% of annual US GDP! And while most of them may be doing their best to shelter it outside of the U.S. (Source: WSJ), and in Europe and Asia in particular, these companies still have easy access to that cash and, more importantly, typically have more cash in either the supplier’s home country or a country in close proximity to the supplier (since US companies are still outsourcing just about everything, despite the fact that it often makes sense to home-source and near-source due to rising transportation costs and labour rates).

They’re just choosing to …

Be a mean one, just like me. They really are a heel. They’re as cuddly as a cactus and as charming as an eel,   just like me! They’re all bad bananas with a greasy black peel! They’re all monsters, worse than me. Their hearts are empty holes. Their brains are full of spiders, they have garlic in their souls,   just like me! (Even) I shouldn’t touch them with a thirty-nine-and-a-half foot pole! They fill my heart with envy, The way they run you ’round, And promise you the moon while they run your business to the ground,   fatefully. Given a choice between the two of us, you’d rather have me around! They’re a …

We get the picture Mr. Grinch. They’re terrible people selling our collective futures for a slightly bigger profit today. And the worst thing is that they are too short-sighted to realize that, in the scenario described, a supplier bankruptcy really is their fault. If you told an average CEO that the company’s supplier went out of business, costing hundreds (or thousands) of people their livelihood, because the company too long to pay, what would he say? “It’s not our fault. We only represented 5% of their revenue. If 5% of our customers pay late, it doesn’t hurt us. So if they were run well, 5% of their revenue being late shouldn’t hurt them.” And the CEO would be right if only 5% of payments were late. But the reality is that, for many suppliers these days, is that they have to deal with 50% of their payments being late — real late, because once one mega-company shows that it’s okay to extend payment terms from one unreasonable number to an even-more unreasonable number, every other mega-company follows suit because they have a precedent and they have to do what they can to make their numbers look better, at any cost!

But since none of these CEOs or CFOs take the time to put 2 and 2, or 5 and 5, together, they don’t realize that at some point, there’s going to be too many 5’s, the supplier isn’t going to have the cash, and the local banks aren’t going to step up and lend the supplier any money. Banks don’t stay in business by handing out money to every Li, Wang, and Fung that walks through the door. They do it by managing risk. In this scenario, at some point the bank has to say to a begging supplier “if these companies haven’t paid you by now, they’re probably not going to pay – and even at 20% interest, we can’t lend you money that we feel we have a 0% chance of seeing again“.

So unless you want your company to be one of the ones where the CEO and CFO have this conversation later this year (before they lay you off as part of their bankruptcy restructuring plan), keep on top of Accounts Payable and make sure you do everything you can to insure that your suppliers, especially your cash poor ones, get paid promptly. Otherwise, you’ll be a grinch by association. And we’re better than that!

The answer is that the blame lies entirely with …

One party, but before SI reveals the answer, let’s shed some more light on the situation. It turns out another chance occurrence of a number of temporary simultaneous wormholes through the multi-verse just happened to align in the right formation to carry another conversation forward from the future, through the Heart of Gold when the Infinite Improbability Drive is on full and when Mr. Dent happens to be brewing a cup of tea (so the conversation, originally not in English, happens to be, miraculously, in English). This conversation appears to take place about a month before the last one from the contextual clues.

Presumed Setting: The CEO walks into the office of the CFO, who is slumped over his desk.

Supplier "B" CEO: Are you ok?

Supplier "B" CFO: We’re done.

Supplier "B" CEO: What do you mean?

Supplier "B" CFO: The bank won’t give us another loan.

Supplier "B" CEO: What do you mean? We have millions on the books in receivables! And orders are still flying in!

Supplier "B" CFO: Yes, on the books. But we haven’t gotten a single payment in six months.

Supplier "B" CEO: So? This is normal these days.

Supplier "B" CFO: But we owe them millions.

Supplier "B" CEO: But we have millions in receivables, and we did get money six months ago.

Supplier "B" CFO: But we haven’t been able to even keep up on our interest payments in three months.

Supplier "B" CEO: Then go to the other bank.

Supplier "B" CFO: No other bank will talk to us.

Supplier "B" CEO: There’s always private equity.

Supplier "B" CFO: They won’t touch us.

Supplier "B" CEO: What about?

Supplier "B" CFO: The Triad? They don’t think we can pay either, they know we can’t cover it personally even if they break all our kneecaps, and our equipment isn’t worth enough on the black market.

Supplier "B" CEO: How do you know?

Supplier "B" CFO: I dropped by the back room of the local mahjong parlour looking to make contact and the Liaison Office sat down at my table shortly after I arrived. Seems they already knew of our plight and knew why I was probably there.

Supplier "B" CEO: What do we do?

Supplier "B" CFO: Well, we can’t make payroll next week. We have no choice but to shut down immediately.

Supplier "B" CEO: But then we’ll go into receivership! The bank will sell us before we have time to figure something out!

Supplier "B" CFO: Probably.

Supplier "B" CEO: But we have money coming!

Supplier "B" CFO: And I’ve contacted our five biggest clients repeatedly. They keep saying soon, and then hang up.

… at this point, a wormhole closes … but a few hours later, we hear this, a conversation which probably takes place in the very near future but before the last two conversations:

Accounts Payable Clerk: The phones are ringing off the hook. Our suppliers want money. When can I pay them?

CFO: Depends on who is asking, how late we are, and what the consequences are. If we pay them all now, we’ll tank our first quarter. Let’s review the list, in order of amount outstanding, until we cover 80% of the outstanding dollar amount. The last 20% you can pay two weeks after they ask again. With a check. In the mail. Go.

Accounts Payable Clerk: We haven’t paid Supplier “A” in nine months, they account for 12% of our outstanding payables, and they are livid.

CFO: Catch up 3 months today, and promise to catch up 3 more months next quarter. They’re still on contract for another year for what is currently our second best selling product line, and they aren’t going to do too much to risk that business.

Accounts Payable Clerk: Next is Supplier “S”. They’re 10% and they are threatening to sue, even though we’re only seven months behind.

CFO: Well, we didn’t renew their contract and since we haven’t ordered a thing from them in six months, they probably think we don’t intend to pay and that they don’t have anything to lose. I was discussing them with Legal the other day and they have a history of being litigious. I think we have to pay them as we can’t afford the distraction of a legal battle, or the unnecessary cost. Give them half today and promise the rest next quarter.

Accounts Payable Clerk: Next is Supplier “B”. They’re 8% and we’re 10 months behind on some invoices.

CFO: Don’t worry about them.

Accounts Payable Clerk: But like Supplier “S”, we’re not using them anymore.

CFO: Not true. While we did discontinue our worst selling product line, which they were providing, they did win the contract for our new product line, which we expect to be the top seller next year. It’s worth millions to them. They won’t jeopardize that. Plus, they’re growing. They can wait another quarter. They’ll be fine.

… at this point, the conversation trails off, but now we have the whole story and the blame rests solely with:

Will it be the supplier’s fault that your company might be one of the companies filing for bankruptcy this year? After all, the supplier didn’t communicate any issues as per their contract, leaving you to find out about your predicament only after they went belly up and your order didn’t arrive. The CEO and CFO might paint that picture when the time comes, but is it the right one?

Let’s examine the various learnings from the future conversation, heard through the chance occurrence of a number of temporary simultaneous wormholes through the multi-verse that just happened to align in the right formation to carry a conversation from the future to our ears in the present (as we all know wormholes can’t violate the asymmetry of time within any universe with asymmetrical time, such as ours). We learned the following facts:

1. the company had no back-up supplier
2. the only available supplier the company can find on short
   notice does not have the right production
   equipment because the company designed a product that required
   a specialized piece of production equipment that has to be
   custom, hand, manufactured and requires a rare earth metal
3. they have less than 2 months of cash reserves, despite a
   plan to have at least 6 and an expectation of 8 months of
   cash reserve by the CEO
4. the company delayed as many payments as possible for at least six-months to manipulate the numbers at year end; when they released most of the delayed payments, 15% of the reserves were slashed
5. the company delayed settlement of a class action lawsuit as they thought the delay would minimize their losses, but the legal bills came in at three times the expected rate
6. the company tackled a big-bang IT ERP and dependent-system upgrade which overran project costs by 50% before costing the organization millions in unexpected up-front renewal charges
7. the company voted themselves big bonuses that ate up almost two months of cash reserve

I don’t know about you, but this sounds pretty damning. Let’s consider each point:

1. no back up supplier for a critical product the company
   was banking it’s future on; there should at least have been a back-up supplier identified even if the product was to be sole-sourced
2. designing a product that could only be produced by a
   specialized production line, of which there was only one; you should always have one back-up
3. poor working capital planning, as they apparently
   had no back-up plan for an unexpected recession; you don’t need to have cash in the bank, but you at least need to have credit lined up to cover the maximum expected disruption
4. extremely poor working capital management as every $10 of payments delayed costs an organization at least $1 in the end; this is just dumb
5. the company played legal games instead of just owning up to their error(s) and getting it over with; this is also dumb (maybe there’d be a few more claims, but it’s likely the claims would not have exceeded the ridiculous legal bills by trying to avoid your responsibility for too long)
6. the company bit-off a big-bang project, knowing that most big-bang projects end with a big bang; this is very dumb (just because you replace your ERP, doesn’t mean you have to replace your ERP driven systems: you just have to create an interface for them with appropriate middle-ware)
7. knowing that cash was tight in the previous year, and knowing that numbers had to be manipulated to look good, the company still voted themselves big bonuses; dumb, dA, duMB, dUMB, DUMB!

Yes, it’s damning. But was it enough to blame the failure (entirely) on the company? Let’s consider the points again:

1. This was entirely their fault.
2. This was ultimately their fault, but they may have been (mis)led by the supplier.
3. This was their fault, but if you really think you have more cash than you need, you are allowed the luxury to direct your attention to other issues as there just aren’t enough working hours in the day to constantly monitor every issue.
4. This was entirely their fault.
5. This was ultimately their fault, but they were likely misled by the outside council who knew, full well, that minimizing the company’s consumer liability would likely maximize the company’s liability to the council’s law firm.
6. This was ultimately their fault, but they are a manufacturing organization, and they were probably misled by the outsourcing vendor who said that the safest way to go was to replace all of their ERP dependent systems instead of writing middleware (as the vendor, likely a Big 6, wanted to maximize its bottom line).
7. This was entirely their doing, but when you consider the prevailing winds, you can’t hold them at fault since every company does it and at least this company restricted their excessive bonuses to what they thought was the cash available after minimum reserves were accounted for.

In short, everything was ultimately the company’s fault, but three decisions were probably heavily influenced by greedy external providers who did everything they could to lead the company down the chosen path under the veil of good advice. And one issue was not necessarily one the CEO should have been focussing on with the mis-information he was given.

But, and this is the kicker, the CEO was right in that if the supplier had not gone bankrupt and shut-down before delivering the company’s order for the quarter, the company would be doing just fine.

So where do we lay the blame? The dodgy supplier that ultimately put the company into bankruptcy? The supplier and the company, as both made mistakes and both likely played a part? Or the company, as it was ultimately the company’s responsibility to manage their operations and cash, monitor their supply chain proactively, and prevent disruptions that could bankrupt them?

The answer is that the blame lies entirely with …