'Trouble', Ed writes in his diary entry, 'a customer has gone public saying that its production lines have stopped because we failed to deliver the whole of an order.'
'The customer is designing us out and suing for damages', adds Ed, 'since he makes Portable Navigation Devices, and he says our order was short by 30,000 pieces, he wants 30,000 multiplied by the retail value of the lost PND production which he says is $100 apiece - which means we're in the hole for $3 million.'
A few days later, another entry appears in Ed's diary:
'"At the emergency board meeting to discuss the ramifications of our delinquency, one of the VC board members asks the crucial question: "Why did this happen?"'
'Naturally I blame the foundry for being short on our order, and the VC director then says: "Well in that case we can recover damages from the foundry".'
'My heart sinks', writes Ed, 'it's time to 'fess up. I told the board: "I gave the foundry orders to cut back on that customer's production because we needed to fulfil an order at a better margin for a wireless customer", I tell the board, "I was advised that the PND business was deteriorating fast with the competition from smartphones, which increasingly have GPS, so I thought we might get away with short supply on the PND order. Foundry capacity is so tight at the moment that we couldn't get them to increase our contracted capacity enough to fulfil both orders."'
'"So to satisfy this wireless order which was worth - how much?"
"'$150,000", I reply.'
'"To satisfy an order worth $150,000 you go delinquent on an order that could cost us $3 million?" asks the VC director.'
'You could put it that way", I reply.'
'"I do put it that way'", says the VC director, "if you can't get us out of this hole there will be consequences - consequences like a reduction in your take from the IPO".'
'OmiGod', Ed confides to his diary that evening, 'still, there's only 95 days to go until the IPO then this is over and, whatever they do, I'll have dollars like a donkey has fleas.
VC is not aware of the current market conditions. If he were, he would not be so harsh. AND - who signed an agreement making the supplier liable for late shipments!?!
I suspect if he's prioritised the satnavs over the smartphones he'd have been in even more shit - those cost $300 each.
Sometimes you are in a heads you win, tails I lose situation. However most CEOs I know would have been too scared to make the decision themselves and asked almost everybody else for an opinion on it so that they could never be blamed themselves.
JW : unfortunately late shipment contracts are quite common. Enforcing them is another matter altogether though.