October 7, 2013

Are there options when confronted with a distressed supplier?

I recently had dinner with a friend, Justin Norman, and an interesting topic came up. Of course, the natural flow of conversation was typical: sports, what temperature to sear a steak at, travel, etc. In the midst of “typical”, I learned that he had been traveling to Canada more lately. He mentioned that, in June, his business purchased a plant from Federal-Mogul in Windsor. I asked how that came about -and I came to learn that his customers had initiated many of his recent acquisitions.

Naturally, this sparked my interest. Justin embodies crisis management, so how have his customers, some of the largest automotive manufacturers in the world, been involved in these acquisitions? It turns out that Justin’s business, JD Norman Industries, is approached by customers, before supplier failure, not in the role as a turn-around consultancy, but as a manufacturer capable of acquiring their distressed supplier, turning them around, and saving them from a potential supply chain disruption.

In my 15+ years within Supply Chain solutions, this strategy, with this intimacy from the customer, hasn’t crossed my path before; therefore, I thought it would be a good topic for a Q&A session…

Doug: “Justin, at a very high level, can you please share with us what JD Norman Industries does?”

Justin: “We are a diversified manufacturer of metal components and systems for the automotive and industrial markets. We have operations in the United States, Mexico, Canada, and the United Kingdom. Our focus is primarily highly engineered products, which include formed, machined and cast metals.”

Doug: “Over the course of the past 9 years, JD Norman Industries has had 9 acquisitions. You mentioned to me that it was your customers that drove a change in your business model to pursue distressed business. Can you elaborate?”

Justin: “When I started JD Norman, the pursuit of acquiring distressed businesses was something that just made sense, as it fit within our budget. But it was our first automotive industry transaction that changed our business model. We did an acquisition, which solved a big problem for an automotive supply chain – and hopefully you don’t mind that I am leaving company names out of this discussion, as I’m sure they wouldn’t want me to share their confidential information – and the success we had on that acquisition changed our reputation. We became known in the industry for being able to take on the tough deals. Now our automotive customers turn to us directly and ask that we participate in the sale process of their distressed suppliers.”

Doug: “So, instead of them dropping a higher-risk supplier, your customers are finding more value, and are proactive, in helping arrange these buyouts?”

Justin: “At the end of the day, the value in saving these companies outweighs the significant costs of switching suppliers. If, for example, one wanted to switch suppliers, these companies have to hedge against potential disruption by building a 6 to 8 month inventory bank. Can a distress supplier even handle that additional load? Further, if the supplier is dependent upon your business, even starting to sway the orders from one supplier to the other may put them out of business, before you, or the replacement supplier, is prepared. Either way it increases the chance of disruption.”

Doug: “What other benefits are there to the customer?”

Justin: “The obvious benefit to the customer is continuity of their supply chain, without switching cost and associated risk; however, there are many other benefits. I, for example, haven’t heard a customer state that their objective is to increase their suppliers. They want to consolidate suppliers, and this strategic tactic enables them to continue to consolidate suppliers, while ensuring they are working with those that ensure their supply is not only available, but often with better quality. And, let’s face it, though many do not like the reality… it builds loyalty. I am much more amenable to customer demands, such as price concessions or timelines, with a customer that helped us put together a $30 million deal, than those that I do not have a close relationship. One of our ethos is to ensure we perform at a high quality for all of our customers, but many of our relationships we view as true partnerships.”

Doug: “What about you? I am sure you don’t ‘snap up’ every company that is presented to you. What is your criterion to make these kinds of investments – and have unions affected your decisions?”

Justin: “Doug, our business strategy has been to build organically. We have always felt that we need the right products that we can sell to our customer base and that our operations must be in locations that assist our efficiency. Sometimes, though, it makes more sense, and is cheaper, to acquire a plant than start from scratch. Also, we have found times that it is beneficial to purchase an organization for their customer base. But at the end of the day, any acquisition has to fulfill a piece of our strategic puzzle. It is not purely opportunistic, as we would have a very fragmented business. The timing, however, just happens to now be driven by the customer. Regarding unions, we don’t shy away from union deals. If you are a global supplier, you will have to deal with unions; however, a distressed acquisition offers a unique opportunity to change the existing expectations. Union employees know the situation and they don’t want to have their livelihood disappear – and it is rarely the commercial terms that change, it’s other areas, such as finding efficiencies. We have, in some cases, had to completely rewrite the existing contracts and obligations, but that is far less important than ensuring that the acquisition will fit into our business strategy where we can find better efficiencies and economies of scale.”

Doug: “I think it is important to know, for anyone seeking to save one of their suppliers, your approach is very different than how a private equity firm would approach this.”

Justin: “Correct. We do not have a view of buying an asset and flipping it. Supply chain managers need continuity within their supply chain. Within the private equity route, it is likely that the operation will just go on sale again down the road, where we have approached these acquisitions as building a long-term sustainable business.”

Doug: “Can you shed light into the financing aspect?”

Justin: “Sure, these businesses are dependent upon existing customers, and we want to know that we are secure with these orders before an acquisition. Simply put, we couldn’t do this if 50% of the sales, as an example, are lost post-acquisition. On a side note, we never ask the customer for any change in terms, or ask for special considerations. In business you don’t want to be the ‘special favor guys’, and you don’t need it if you are confident in being able to drive positive change. But when we need financing for acquisition, the banks have been quickly able to ascertain the credibility of success. The orders are guaranteed, and the company can show a history of ensuring success.”

Doug: “Not all companies have the same problems. What has made JD Norman Industries successful at turning these various companies around?”

Justin: “Metrics. We do standardize everything, from the paint on the walls to the corporate-wide ERP system we leverage; however, the key is held inside our Business Operating System. We refer to it as The BOS. Everything we track is within one standard system, from 5S methodology, quality systems, scrap rate, efficiency rate, etc. It is all metric-driven. By having this insight, across operations, we are able to quickly see where any problems are, and where opportunities exist. I believe that the greatest manufacturers know and are able to manage their cost on EVERYTHING and it’s the ones that don’t that are going out of business. In essence, it rarely matters what operating problems the company had, for us it is the ability to have insight into all the metrics which help us make the necessary adjustments.”

Doug: “Aside from topline growth, what other benefits have JD Norman Industries found?”

Justin: “Certainly the economy of scale is one benefit. A strategic objective of ours is to continue to offer new products, which are growth opportunities, in new locations. But, in doing so, this has also offered cost savings. Let’s say that I want to build a plant, and it would cost us $50 million, but we have an opportunity to help a customer by purchasing a distressed plant at distressed valuation, it saves us money. That same $50 million investment, without a book of business, may now cost us only $10 million and be secured with a $35 million book of business. These are only example numbers, but you see the point. Our focus remains the same, but the means is now one where our costs are minimized and our customers benefit with us.”

Doug: “Many organizations struggle in identifying which suppliers of theirs are distressed, let alone have the intimacy with their suppliers to know which of those can step in and help mitigate their risk. Can you share more about what your organization did, and/or what your customers do, to stay intimate with your organization’s capabilities and processes? Net-net, it requires more than just basic account management, or supplier scorecarding, doesn’t it?”

Justin: “Doug, it all started for us as being the company constantly raising our hands and hoping to get more involved with our customers. Yes, all of our customers have the standard processes, such as auditing our facilities each year and running Altman-Z scores every six months. On a side note, the best way to find a company in financial distress is to walk their plant floor, but more on that another time. What we have found, though, that our relationships are really built not at a buyer, or commodity, level, but at a higher level. At the commodity-level, we may have many relationships for one customer. Also there tends to be higher turnover at the commodity-level. As such, our customers understand that strategic relationships, across their businesses, are managed at a high level – and that is where we focus as well. This has enabled our customers to get intimate with our capabilities, across the board.”

Doug: “Justin, I know that you are heading off to the United Kingdom momentarily, so I don’t want to take up much more of your time. First, thank you for your time and insight this morning. And, second, in closing, can you share any parting wisdom of which I may have overlooked asking you?”

Justin: “Thank you. This has been enjoyable. I suppose that this all boils down to the basics. From the customer standpoint, they have been able to eliminate switching costs, take risk out of their supply chain, and further consolidate their supply chain. As the supplier, I have found that every time we do something that helps our customers, it rewards us as well.”

Too often when a supplier struggles, the easy answer seems to be to find another supplier. In some industries and/or commodities, this may be best. In other situations, there may be better options. Winston Churchill stated, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty” – and if you know your suppliers, and I mean at a deep level, you create opportunities. In the case of JD Norman Industries, not only have they embraced the challenges of adopting distressed companies, and succeeded for it, their customers have benefited by avoiding disruption, eliminating switching costs, and further consolidating their suppliers under management.

About Justin Norman: Justin Norman has been President & Chief Executive Officer of JD Norman since its inception in November 2004.  Prior to founding JD Norman, Justin spent the entirety of his professional career with Morgan Stanley & Co. within the firm’s Chicago office.  Justin received a B.A. in Business Administration from Taylor University and an MBA from the University of Chicago Booth School of Business.

Topics General

or

Explore our solutions

The answer to all of your third party and supplier management problems.

Learn More

Try for yourself

Give our sales team a call +1 (312) 948-0391 (US) or +44 (0) 203 325 4244 (UK)

Live Demo