Make your business immune to supply chain contagion

The corporate insolvency rate dropped sharply during the Covid pandemic, thanks in large part to government support schemes to help keep businesses going – artificially in some cases. However, the sharp rise in interest rates and wider economic climate saw corporate insolvency levels climb again from 2022.

While lower inflation and interest rates have brought some much-needed respite, hard-pressed businesses still face significant pressures, including increased costs and low consumer confidence.

No organisation, even a resilient, well-run one, is immune to financial distress. Sometimes, the trigger can be largely outwith a business’s control, one such example being the insolvency of a customer or supplier. Where this happens, there is a risk, without action, of “insolvency contagion” and a domino effect that ripples up and down the supply chain.

In our interconnected global economy, supply chains are long and often span international borders. This can bring many benefits around production costs, efficiency and market reach. However, the longer the supply chain, the greater risk of disruption.

Companies might know what to look out for in their own business, but are they familiar with warning signs in their supply chain? Insolvency of a key customer or supplier can cause substantial damage to a business – affecting cash flow, reputation and ultimately a company’s ability to deliver its product.

A clear example can be seen in the recent insolvency of Carpetright which went into administration in July 2024, taking with it sister company The Floor Room, which was historically operationally reliant on Carpetright.

Companies should be monitoring their supply chain to identify signs of distress. The earlier a business establishes and starts dealing with any potential issues, the more strategic options they will have to mitigate risks. This could start from the outset of the customer-supplier relationship by undertaking due diligence to ensure the finances of the other parties are robust.

Of course, circumstances can change, and once contracts are in place it’s important to keep an eye on indicators of financial distress. These can include payment delays or unexpected attempts to renegotiate on price or change payment terms, a reduction in service levels or the standard of goods or services, and changes in the senior leadership or management team.

Where signs of financial distress are spotted, either up or down the supply chain, companies need to assess their exposure and take proactive measures to prevent contagion and protect their own business.

Often the best first step will be speaking directly with the customer or supplier to get a clearer view on what’s happening and cooperate to find the best way forward.

However, this may also be the time to begin exploring alternative suppliers or increasing focus on business development to diversify the customer base, while taking fast, proactive steps to recover any outstanding debts

Ultimately, corporate failure is part and parcel of an evolving capitalist economy, regrettable as it is for the people and businesses affected. Where this happens in your supply chain, the key is ensuring your business adapts accordingly to prevent contagion. This is not always avoidable, unfortunately, and directors should seek advice where it does arise: agility is the best tool to avoid the domino effect.

Fiona Carlin is a director, restructuring and insolvency team, Burness Paull