More legal news
31 January 2002
The risks of having only one source for a vital part have hit the headlines as Land Rover struggles to receive chassis for the Discovery. David Arminas reports
Land Rover's problems with UPF-Thompson, the single supplier of chassis for its bestselling Discovery model, is a shining example of a relationship that went the worst possible way. Ford, Land Rover's parent company, is up in arms at the possibility of losing the supplier, and is adamant that it wishes to maintain a relationship established around 30 years ago.
But the car maker is balking at the proposal by KPMG, the receiver for UPF-Thompson, that it pays £45 million to maintain supply of chassis. Ford has already made "goodwill" payments, worth several million pounds, to KPMG since UPF, which employs 600 people at three plants in the Midlands, went into receivership last November.
KPMG insists that it is correct in demanding the payment. As receiver, it would breach its contract with UPF's bankers and shareholders if it did not get the best money for all the company's assets, including deals with its clients, with an eye to selling the company as a going concern.
Ford has taken KPMG and UPF to the courts and this week a decision was expected on whether the Midlands firm will supply chassis and, if so, for how long.
The wrangle is a warning for single-source relationships and should be a reminder that it takes hard work by purchasers and suppliers to achieve them.
For Ford, the episode is especially embarrassing as the problem has blown up when Land Rover is losing £172 million a year. The debacle has jeopardised Land Rover's ambitious turnaround plans. UPF also has debts, amounting to more than £50 million - around double its annual sales. The contract for chassis to Land Rover represents about 65 per cent of its business.
The situation is a purchaser's nightmare - a major supplier not easily replaced goes to the wall threatening the entire business plan to get his or her company out of the red.
Companies that work extremely closely together often agree to set out a formal partnership agreement detailing responsibilities and working conditions.
The basis of such a deal is the understanding that a single-source relationship brings exceptional risks to both companies. This, in turn, requires exceptional working arrangements where it is not simply another person's word for company performance. There must be access to corporate data and information to substantiate each company's claims and also help in improving the performance of each company.
Although Land Rover and UPF had no formal partnership agreement, did purchasers at the former have the necessary visibility of data and information to allow purchasers to properly assess the risk of dealing with UPF? Similarly, was UPF given enough information by Land Rover to improve its performance?
A Land Rover spokesperson acknowledges it would take six to nine months to tool up another supplier if UPF ceased supplying chassis. Ford was aware of UPF's problems before the supplier went into receivership, they added. Questions will no doubt be asked at Land Rover about how the relationship was allowed to continue, given the supplier's financial troubles.
One of the toughest decisions a purchaser can make is cancelling the contract of a supplier with whom they have worked long and hard over the years to overcome difficulties, knowing the loss of business will send the supplier to the wall.
As Land Rover struggles with these questions, purchasers in all sectors should be casting a glance back at those important - especially single-source - contracts.
A new CIPS policy document outlining best practice on risk management has come at the right time. It suggests purchasers should ask themselves those "what if" questions, including what they would do if a major supplier's receiver came knocking on the door one morning. Could they present plan B to not only their board but also the suppliers that rely on them to be a rock-solid client?
Honest reflections on the practical issues of partnering deals, formally agreed or not, are hard to come by. The example of Ford, KPMG and UPF would make an excellent case study for the conference circuit, if the three could agree to share the same stage peacefully.