Ongoing struggles for toy retailer Toys R Us are peeling back the curtain on the risks of supply chain finance, some experts say.
Tuesday (Nov. 7) reports in the Financial Times said the delicate balance of payments through the supply chain led to what Toys R Us called a “dangerous game of dominoes.” In September, the toy retailer’s plans for bankruptcy led suppliers to either stop shipping products to the company or demand cash on delivery.
That meant Toys R Us’ inventory diminished, accelerating its financial struggles — and jeopardizing the finances of the suppliers, too.
According to the FT, suppliers first got spooked when CNBC reports said Toys R Us was considering bankruptcy, setting off a chain reaction with suppliers that ultimately factored in companies, other trade finance players and accounts receivable insurance providers.
“Somebody hears that a company is paying late, in a conversation [somewhere],” explained Deb Rieger-Paganis, business management consultancy firm AlixPartners consultant, in an interview. “Word gets out in the marketplace and credit insurance starts tightening up. Suddenly the factors say we won’t buy accounts receivables and then vendors stop shipping to retailers.”
Toys R Us suppliers, including Mattel, have been struggling as a result of its decision to stop selling to the retailer. Reports said Mattel’s third-quarter revenues declined by 20 percent in North America, with half of that decrease linked directly to the Toys R Us issue.
According to analysis by financial services provider Moody’s, the balance of supply chain cash flow can be so quickly disrupted that quarterly financial reports can’t always catch it. Moody’s pointed to the 2002 bankruptcy of Kmart, which posted $6 billion more in assets than liabilities, but was forced to file Chapter 11 because it missed a $78 million payment to one of its grocery suppliers, according to reports.
Toys R Us secured $3.1 billion in financing in September, soon after it announced bankruptcy.