© 2006 Dream Merchant Dream Merchant • 2309 Torrance Blvd. #104, Torrance, CA 90501 (310) 328-1925 email: Jkm316@aol.com
Are You Considering an Outside Suppler for Your Critical Materials? It's Good to Investigate That Company's Track Record.
By James F. Riordan
PART TWO
I always recommend that you evaluate a potential supplier in terms of their longevity. The "Projected Longevity" is their ability to stay in business for at least one minute longer than the projected product life cycle. Now, here's a possible horror story.
You contract with Company A. purchase $20,000 worth of inventory, and pay for it. But before the goods are delivered, you get a phone call from Company A, informing you that they have filed for Chapter 11 under the bankruptcy code.
The horror story really reaches full steam with the word "bankruptcy." Company A also states that somehow your twenty thousand dollars worth of inventory (which you have already paid for and which they were storing for you) is somehow missing from the warehouse. In disbelief, you check to see how much you owe Company A from the last shipment of different and separate components they sent you. You find you owe them ten thousand dollars. The way you see it, besides causing your production line to grind to a halt, Company A owes you $10,000 for the balance of the missing inventory.
However, the way a bankruptcy judge sees it, the issue of the lost inventory is DIFFERENT from the issue of the ten thousand dollars you owe Company A. You cannot "credit or offset" your account for the lost inventory. Nor can you use the lost inventory as recoupment within 90 days prior to the bankruptcy filing date. This is considered "preferential treatment of a creditor."
The judge then orders you to pay the bankruptcy trustee the full $10,000 for the last shipment you received and orders you to file a separate claim with the trustee for the twenty thousand dollars of your inventory which they lost. And on that claim, you will be lucky to get ten cents on the dollar, by the time most of the money morally owed to creditors is magically transformed into "attorney fees." How can the judge let that happen? Some people answer, "That's easy, because most judges were lawyers once."
The moral is always ask for the financials of any person or company you depend on for your product's success. Don't guess! If there is any doubt, take out a performance bond to assure that you'll get paid.
Another approach to consider, if any of your suppliers of critical materials, components, sub-assemblies or computer software looks flaky, is to have a third party "escrow," wherein a third unbiased and impartial party hold documents containing trade secrets for manufacturing processes, or source codes for critical software, or signed licensing agreements, etc. Then, if your supplier goes "belly up," or fails to perform or support you for any other reason, the third party turns over the critical information or intellectual property to you, so that your business isn't interrupted or fatally injured.
Let Riordan's law be your guide: IF IT LOOKS AS THOUGH THE SUPPLIER HAS EVEN THE SLIGHTEST OR MOST REMOTE CHANCE OF FAILING, TREAT THEM AS THOUGH THEY WILL FAIL FOR SURE.
NEXT MONTH: More on using outside suppliers
The above article was taken from James F. Riordan's classic book, HOW TO EVALUATE THE POTENTIAL FOR SUCCESS OF A NEW PRODUCT OR TECHNOLOGY. Riordan's highly-acclaimed, 36-point system is a valuable tool for inventors, product evaluators or anyone interested in the invention process. Each section is followed by a comprehensive questionnaire that can be used to evaluate your product.
The highly-recommended book can be ordered through the Dream Merchant, 2309 Torrance Blvd., Suite 104, Torrance, CA 90501. The phone number is (310) 328-1925.
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