I received a call the other day from the president of one of our clients to get my thoughts from a credit and collection perspective on what to do with a shipment that their customer put on hold.  

Our client, a specialty plastics film manufacturer, received an order from their long-term customer back in January of this year to ship out approximately $100K worth of product in May. Although the product has been produced according to a specific chemical formula and compliance standards, due to the pandemic and loss of business, the customer informed our client in April to put a hold on shipping it out until their business recovered. Unfortunately, as the months have rolled by, the customer’s business doesn’t appear to be improving and our client is worried that they’ll be stuck with this order. Here were some of my questions and thoughts (and the client’s replies) for your consideration. 

Can we first obtain as accurate of a financial view of the customer as possible? Since our client has been selling to their customer on a long-term basis, and presumably has a good relationship with them, it’s imperative to find out the customer’s exact financial status. I proposed to the client to request the customer’s latest financial statements and sales forecast that will indicate the realistic future outlook. Having a clear understanding of the financial base line and where the customer is heading, is how all parties can begin to effectively work together. 

Is the customer using the product directly in their own manufacturing process or reshipping it to other companies for their manufacturing use? If the product is being resold to the customer’s customers, then it might be possible to temporarily ship directly to the end manufacturers and pay the customer what their mark up would be. This may be one way to resolve the shipping and billing issue for this one particular order. 

If the customer is using the specialty product directly, based on the financial forecast is it possible to still ship and bill for this order only on extended payment terms? Under normal conditions and for several years, the customer was contracted to pay the client at net 30 days, but usually payment arrived between 40-45 days. However, in view of the relationship and extenuating circumstances, I suggested that perhaps for this order a multiple month installment plan might be a possibility. 

Are there any other customers that could use this specialty manufactured product in their manufacturing process in which such unique specifications aren’t required? According to the client, it really depends on several factors. If a customer has a need that does not have to meet stringent criteria, then it’s more likely that it can be reformulated and be resold. However, it most cases, the nature of the product requires detailed specifications for each manufacturing process, therefore, the likelihood of reformulating and reselling a simplified version of the product is rather low. 

Does the specialty product have any salvage value or can it be reformulated to be used in the manufacturing of other products? Again, according to my client, the answer is, “Yes and no.” Any product can be reformulated but if we think in terms of a chocolate cake that’s already been made, crumbling it up and making another cake out of it using different ingredients may yield something that is not readily edible, let alone good to eat. In addition, sometimes the effort and cost to reformulate what was already specifically produced is just not a cost-effective endeavor. 

How long is the specialty product’s shelf life? This is also a very big factor in getting the product to the customer and having it be used in their manufacturing process. Since at about the one year point the product loses its pliability, if it’s not used before then, the product will have to scraped and the salvage value is only about 20% of the total cost to produce. 

Subsequent to our conversation, the president called me a few days later to tell me that he was able to obtain his customer’s financial statement and sales forecast, and that they were having a very heart to heart talk about the next steps. I was delighted to hear that since at least it’s imperative to have the lay of the financial land before offering proposals and making decisions. I’m sure I’ll be hearing back shortly with what the client believes their best option will be. 

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This article has been edited by Steven Gan.

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