What happens when one member of a vast supply chain gets in trouble? Do the other members respond with assistance and enhanced support, or do they pull back to protect their own interests? The answer depends on the supply chain of course, but Sears is finding that its supply chain partners, worried that the retailer’s troubles are going to lead to its closing, are no longer willing to put themselves at risk to help it.
Notably, when Sears sought and received Chapter 11 bankruptcy protection, representatives of multiple levels in its supply chain reacted by starting
to cut ties with it. Various suppliers indicated they would no longer ship products to Sears, out of concerns that the inventory ultimately would sit idle in stores, unpurchased and unpaid for by the retailer. At the same time, logistics and transportation service providers insisted on immediate payment before they would deliver any products from the suppliers still willing to send merchandise to Sears. Other service providers, such as the companies that ensure its warehouse machinery is in good working order, similarly have threatened to halt their efforts if they do not receive payment for existing and ongoing invoices.
In filing a request to use some of the funds allocated for its bankruptcy-induced reorganization to pay these vendors and service providers, Sears made its dependence on its supply chain partners clear. In an earnest plea, it noted that its “Failure to continue sourcing inventory through its existing network of vendors on commercially reasonable terms could have catastrophic consequences for the Company.”
Sears appears to hope that these earnest efforts and at least partial payment will keep the supply lines flowing, so that it can continue to sell products and earn revenue even as it reorganizes. However, past examples indicate that even that might not be enough. Toys ’R Us was able to convince toy manufacturers to keep its shelves stocked for the critical holiday shopping season, but even with sufficient stock, within just a few months of its busiest time, it had announced it was closing all its stores.
Yet the current bankruptcy plan continues to take a cautiously optimistic view. Sears has entered into several new licensing deals, to expand the product lines that carry its well-known Kenmore and Die Hard brands. In these cases, new suppliers clearly are willing to initiate a new project with the retailer, even while its bankruptcy proceedings continue.
Sears believes that if it can close underperforming stores, enhance its performance in other stores, and shore up the strength of its supply chain, it can emerge from the proceedings ready to compete. The question that remains is whether its partners are willing to put themselves at risk to help it get there.
Discussion Questions:
- What’s going on at Sears?
- Should vendors and service providers continue to supply Sears, or should they pull back to avoid greater damage, if the retailer ultimately closes?
Source: Jennifer Smith, The Wall Street Journal, October 15, 2018; see also Kimberly Chin, “Sears Expands Kenmore, Die Hard Brands with Licensing Deals,” The Wall Street Journal, November 1, 2018.