Magazine article Business Credit

Critical Vendors and Essential Suppliers: New Meaning in the Auto Supply Business

Magazine article Business Credit

Critical Vendors and Essential Suppliers: New Meaning in the Auto Supply Business

Article excerpt

When Henry Ford improved the moving assembly line in the early 20th Century and started America on the road to automation, he realized the smallest component of an automobile was as important as its biggest component. If the smaller piece wasn't available, a ripple effect would be created affecting the entire assembly line.

Little did Mr. Ford realize that such a scenario would be played out today, as smaller automotive suppliers and vendors are filing bankruptcy petitions or experiencing cash flow shortages. The decline of these smaller, though critical, vendors could affect the entire automobile production process.

During the last 18 months, auto parts and material suppliers have experienced increased pressure from the original equipment manufacturers (OEMs)--Ford, General Motors and Daimler-Chrysler--to reduce their prices or to absorb a greater portion of the high costs incurred in production of auto parts. For the auto part supplier, much of the design and engineering costs are incurred and unpaid until the first parts actually is incorporated into a finished product.

Although none of the Big Three OEMs have filed bankruptcy, a number of the Tier One suppliers--Delphi Corporation, Tower Automotive, Meridian Automotive, Collins & Aiken and Dana Corporation--have done so. In each case, the bankruptcy courts have entered orders allowing the reorganizing Tier One to favor certain essential suppliers over others. In these cases, the concept of essential supplier takes on a heightened meaning, as each of the Tier One suppliers struggles to survive.

The Parties

The Tier One suppliers are those manufacturing the greatest number of parts and components for the OEMs. Below the Tier Ones are hundreds of tool and die makers, plastic injection molders, steel fabricators and numerous other manufacturers of various automobile parts.

The ability of the OEMs to see each vehicle through to the dealer showroom requires that all of the parts needed to be assembled arrive on time and in the right quantity. If any part of this supply chain fails, the OEM's final product cannot be shipped out in a timely fashion, or at all.

Critical Vendor Orders In Tier One Supplier Cases

The Tier One and lower-tier suppliers seeking protection from bankruptcy courts have the benefit of the automatic stay, which prohibits them from paying pre-petition obligations to suppliers. As a result, the bankruptcy petition of a Tier One supplier can trigger significant financial problems for lower-tier suppliers, as well as supply problems for the Tier One supplier. In order to address this distress and to keep the lower-tier suppliers in business and to keep the flow of materials and parts coming to the Tier One Chapter 11 debtor, debtors routinely file motions asking the court to allow them to pay those suppliers they deem "essential." The entry of such an order allows the debtor to make payments to the suppliers that would not be allowed without the entry of the order. In return for protection under such an order and the payment of the pre-petition claims, the "essential suppliers" agree to continue shipping product to the debtor and to sell on credit terms usually similar to those terms in place pre-petition with the debtor.

The rationale is that payment of the claims of critical vendors is vital to a debtor's reorganization efforts because:

* the goods and services provided by critical vendors are often the only source from which the debtor can procure such goods or services;

* failure to pay the critical vendor claims would, in the business judgment of the debtor, result in the critical vendor refusing to provide its goods and/or services to the debtor;

* the critical vendors provide goods and services to the debtor on advantageous terms; and/or

* the critical vendors themselves would be irreparably damaged by the debtor's failure to pay their pre-petition claims, resulting in the debtor being forced to obtain goods and services elsewhere that would either be at a higher price or not of the quantity required by the debtor. …

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