Situation: A company faces a difficult situation. One of their customers placed a substantial order for custom product a year ago. They have taken delivery of some product but the bulk of the order is still in the company’s warehouse. The company negotiated a cancellation fee with the customer, but they haven’t paid. What is the best option for the company? How do you deal with a deadbeat customer?
Advice from the CEOs:
Because the customer is unresponsive, be ready to take legal action. Get an attorney. The initial process to prepare for a suit may cost $5,000-7,000. Therefore be prepared to sue for damages plus legal fees, with the threat that liens will be put on the customer’s business during the settlement process.
Once everything is ready for a suit, talk to the customer – the message is either they pay in full what they owe or you’re ready to file a suit which will cost them much more.
The Uniform Commercial Code may cover you for custom product. Check this out. This is important so that the company won’t be exposed to a countersuit for filing a frivolous suit.
A route which may be less expensive is to hire a lawyer on a contingency basis. Contingency lawyers may want up to 40% of the settlement or judgement to take a case, and the value of the case has to be large enough to attract their attention.
Situation: A mid-sized company has taken over management of the supply chains for several large customers. The products that the company manufactures have long lead times both for sourcing materials and manufacturing customer orders. Sometimes customers either ask for additional production on an existing order in process, or ask for deliveries to be spread beyond contracted timelines. Either situation has a significant impact on the cost of producing the order and company profitability. How do you manage customer change orders?
Advice from the CEOs:
The issue is one of managing contracts and customer expectations. Because this is hurting the company, prime the customers now that things will need to change in the future. Depending upon the level of comfort the response can be reactive or proactive.
A proactive response: because this happens with some frequency, establish a change order schedule and share this with the customers. Your message will be that you are happy to accommodate changes in orders, but you need to recover the cost of these changes in order to be able to continue supplying the customer. Include the change order schedule in future customer purchase contracts. This may cause them to have second thoughts about requesting changes in orders.
A reactive response: the next time a customer makes these demands the response can be: “We’ll take care of you this time but when we draft our next contract we have to adjust the terms of the contract so that it is a win-win.”
The appropriate response depends on value of each customer’s business to the company – both revenue and profit – and your confidence in the relationship with the customer.