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Bankruptcy Sucks Part I. But, it does happen to good companies with well intentioned leaders.

July 15th, 2009

It’s a shame when a company has to declare bankruptcy. Consumers suffer, employees suffer, suppliers suffer, and in fact all stake holders suffer.

In this authors many years working in the retail industry, companies seeking protection through bankruptcy as a way to reorganize has never gone away and probably never will and certainly is very common during challenging economic times..

Too many times however actions that could or should have been taken never get implemented or seriously considered in the name of relationship management, supply chain cooperation and maintaining the status quo.

The retail industry has never totally embraced the use of reverse auctions as standard approaches to procurement as measured by percent of spend under the management of these tools. For those companies that have, bankruptcy is probably not something they have to look forward to in their future.

Let’s look at a simple example of the bankruptcy approach. Company A has annual sales of nearly $2B from their 150 locations. The same chain has bottom line profit of $20M or 1% of sales. The company as a result of reduced sales which means reduced cash flow and resulting slow payment, get’s itself into trouble and decides to declare bankruptcy to deal with their problems. The immediate plan is to close 10 stores. Typically these stores employ 100 to 150 full and part time associates. So we are talking about losing 1000 to 1500 jobs. If we make the assumption that all things are equal (which they never are) single store sales in this model would equal about $13.3M annually or $255K per week. Losing these sales would impact the company’s net profitability by about $133K in profit per store or $1.33M for the ten store group. Cost of goods for this group of stores would be about 70% or $93.M. I think you’re beginning to get my drift, although rent and certain liability expense won’t go away, let’s assume when backing in to this that 99% of the chains cost for these stores goes away since net profit is 1%. The company from a simple cash flow perspective saves or $131M which minus restructuring charges would save about $11M per month.

Please visit with us again for tomorrows post to consider an e-procurement alternative to the above bankruptcy financial model.

We look forward to and appreciate your comments.

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