Earlier this month we alerted Supply Chain Matters readers to the unfortunate filing of bankruptcy by retailer Sports Authority. Characterized as one of the largest sporting-goods retailers, the chain has been weighted down with debt from a prior leveraged buyout a decade ago. Today, business media has added a more disturbing development to this ongoing bankruptcy process, one that by our lens has significant ramifications for supplier collaboration practices within retail as well as other consumer goods focused supply chains.

In its bankruptcy filing, Sports Authority indicated $1.1 billion in debt that included $717 million in bank loans and over $200 million in trade debt owed to suppliers. As is a common practice in retail supply chains, suppliers had consigned inventory to this retailer, expecting payment when the goods were sold to consumers.

This week, the retail chain filed lawsuits with more than 160 of these suppliers challenging supplier claims to consigned inventories. According to a published report from The Wall Street Journal, upwards of $85 million in shoes and other gear that are currently on the shelves in retail stores and are at-stake. The supplier lawsuits are apparently a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. According to this report, Sports Authority is owned by a private equity group as well as a consortium of banks that are apparently seeking to test defects in inventory consignment agreements.

Suppliers themselves have demanded that the retail chain stop selling these consigned goods because of their belief that they hold ownership to the inventory. Accordingly, lawyers for the retailer are invoking what they believe are unique powers defined under bankruptcy laws.

Yesterday, a court ruling from a judge instructed Sports Authority to comply with supplier demands to return the consignment inventory and reinstate arrangements that existed before bankruptcy filing. Lawyers for Sports Authority apparently are willing to comply with the judicial decision but also continue with the supplier lawsuits as a means to reclaim the monies later if their lawsuits are successful.

While we are not lawyers nor profess to interpret laws, this development struck a nerve within our supply chain management lens, thus we are alerting our readers to this development.

As our industry supply chain readers are well aware, consignment inventory or vendor managed inventory (VMI) practices are fairly common practice in consumer goods focused and other select industry supply chains.  They were designed as a response by suppliers to assist key customers in their inventory and cost-of-goods sold (COGS) financial objectives. In essence, suppliers holding inventory ownership until goods are sold is a means of lower cost inventory financing for the buyer. Challenging such practices under the umbrella of bankruptcy protection is an ominous sign, one that if successful, will by our view, reverberate across multiple supply chains and muddle inventory ownership practices. Further, it represents a new low by private equity firms in challenging successful established business practices for singular gain. It literally challenges the notions of win-win supplier collaboration practices.

How all of these developments turn out is a matter of time and interpretation by courts.  However, we wonder aloud whether this effort, regardless of final outcome, provides a longer-term setback in joint inventory management practices.

We welcome the views of our readers either through comments associated to this commentary or by direct email.

Bob Ferrari

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