What happens to you – and your customers – if one of your suppliers goes out of business? It’s all about the strength of your relationships, says Saxon East

When Empire went into administration in January, the impact was felt all the way down its supply chain. For insurers with good contingency plans, the loss of the electrical replacement supplier was resolved with little disruption.

But for those without, it led to headaches for claims managers.

First, insurers had to identify which customers were waiting for replacement goods. Then they had to find alternatives at short notice.

James Hislop, chief executive of The Replacement Service – which pulled out of a bid for Empire last month – says his company has been filling in for insurers that were left hanging. “It left some insurers wondering if they ever wanted to deal with suppliers again.”

Empire was not a one-off. The collapse of Woolworths last November proved that no high-street stalwart is immune. And last month, Saab, which owns dealerships and body repair shops across the country, filed for bankruptcy.

As the recession takes hold, insurers and their supplier partners – car dealerships, garages, engineering firms, building companies and others – are feeling the heat.

It’s vital for insurers to have healthy working relationships with these suppliers. They also need efficient systems that can track the movement of goods and pinpoint which policyholders are waiting for help. But perhaps most important is a contingency plan.

What’s your back-up plan?

One strategy is to set up a team of supply relationship managers. They will monitor the supply market – checking share prices, reading company reports and keeping on top of the news – and alert an insurer if they think a supplier is in trouble.

AXA is one insurer that has benefited from having such a team. “Empire Direct was one of our suppliers and we were aware that things were not looking that good. We picked up a couple of rumours,” says David Williams, managing director of claims at AXA.

These supply watchdogs are also charged with predicting the knock-on effects of one company’s failure. When Woolworths went down, for example, it dragged under its distribution arm Entertainment UK. Entertainment UK supplied retailer Zavvi with CDs, DVDs, games and books. Its demise turned out to be a crucial factor in Zavvi going into administration.

It is important for insurers to understand the interlinking relationships between businesses – and to take a wider view of the economy.

Williams says: “Because we saw the impact of sub-prime in North America, we wrote to our largest suppliers and said, ‘You are a really important part of our business delivery.’

“We were keen to know if suppliers had exposure to the sub-prime market. We were very keen to get responses back.”

Williams believes the economic crisis will force insurers to improve their risk management when it comes to suppliers.

“Those companies that may not have paid so much attention to contingency plans will be scurrying around trying to get good ones in place,” he says.

Use technology to stay in touch

For many insurance buyers, price is everything. But insurers that offer the cheapest quotes to customers often make up the difference by squeezing their suppliers. If they push too hard, however, they could jeopardise their relationships with suppliers – and end up hurting their own clients.

Robert Smale, claims and operations director for Fortis, says a robust claims system relies on treating suppliers well. Paying invoices quickly, for example, can make a big difference to suppliers’ cashflow.

“The fact that we are quick payers is one of the ways that we sell ourselves to small suppliers,” says Smale. “It helps suppliers through these difficult trading conditions.

“We also put a lot of effort into making sure we give clear instructions to suppliers, so they know exactly what to do and don’t waste valuable time checking everything with us. It helps them get on with their job efficiently.”

Hislop of The Replacement Service offers an alternative solution to keep suppliers’ cashflow healthy: a payment system in which insurers provide suppliers with a monthly cash pot of, say, £100,000. If the supplier goes over budget, the insurer can make up the shortfall in the next payment. But suppliers should over-spend only when they need to, he says.

Hislop believes insurers fall into two camps. “First, there are those that want claims settled as cheaply as they can; this does not look good for the retention of clients. Others will look for service and good settlement and be focused on the retention of clients,” he says.

“We have seen it with the motor repair world, where insurers have squeezed suppliers down to the last cent and they have said, ‘We are packing up as we’re not going to work for nothing’.”

Spread out

It is important to have a varied panel of suppliers, even in one particular claims area. If an insurer becomes too reliant on one supplier and that company goes belly up, that insurer is in trouble. This was a problem with Empire, which had large volumes of trade with its partners.

“The more volume you have with a single supplier, the better price you get,” says Smale. “But in a recession you are more exposed to a similar thing that happened with Empire. There is more to a relationship than just cost.”

Williams adds: “When Empire Direct went into administration we only had issues with 10 people. We contacted those 10, which was easier because we have good tracking systems now. Another supplier stepped in to tie up the loose ends.”

Although the Treasury predicts that the economy will pick up late this year, others feel the worst is still to come. The speed at which companies are failing is frightening – Empire collapsed in just a few days.

Smale says: “It’s the speed of this recession that is the major difference to others. During the recession of the early 1990s, we had warnings it was coming and there was preparation.

“But when it affects banks, it is especially bad for businesses. If people have credit facilities, those can be withdrawn quickly and that means a healthy business can become a failed business overnight.”

To beat this recession, then, all aspects of the supply chain – contingency plans, systems and relationships with suppliers – must be top notch.