The 3 Best Times To Think About A Supplier's Financial Health
The stakes are high when a critical supplier fails.
Last month, when a key supplier for General Motors filed for bankruptcy protection, it almost shut down the automaker’s North American operations.
Clark-Cutler-McDermott Co., was a four time “supplier of the year” that manufactured parts for nearly every GM car and truck model. The relationship soured as contract-related pressures eroded the supplier’s profitability.
Procurement experts have offered many prescriptions for building a productive supplier-customer partnership, and we won’t add to that discussion. But here's another key takeaway from this supplier bankruptcy: the best time to identify a critical supplier’s financial risk is in time to get ahead of it.
Financially troubled companies exist in every industry, and a supplier’s financial health should not be overlooked.
Three Times to Think About A Supplier's Financial Health
There are three important times in the customer-supplier relationship to think about financial risk:
Initial Product Sourcing: When evaluating alternative suppliers for a new project, you’ll want to fully understand their financial health to make sure you’re not overlooking any important financial risks. Check the financial risk score of each prospective supplier to weed out financially distressed companies, and look for alternatives if necessary.
Ongoing Management: After a product's initial sourcing, you still need a process to monitor your supplier's financial health. Advanced warning of financial difficulties increases your margin of safety. And with thousands of companies in a global supply chain, and a large number of critical suppliers to monitor, automating this process is key. Bottom line? A "one and done" approach is how procurement gets burned.
Longer Term Planning: With a global supply chain, events anywhere in the world can drastically alter the strategic picture. To achieve supply chain resiliency, make time to discuss new developments on the horizon. Is your industry facing major disruption, as in energy or mining or retailing? Will a potential new a trade deal impact manufacturing locations or margins? What other developments will impact your critical supplier's financial picture? Schedule time to learn how they are positioning themselves - and you - for change.
A Telltale Pattern of Supplier Financial Distress
Whether triggered by industry disruption, strategic missteps, or more idiosyncratic events, financial distress is detectable. Falling sales and profit margins, liquidity problems, debt downgrades and a tanking stock price are all common symptoms. A reliable financial risk score typically provides advanced warning of a year or more, regardless of industry.
To read about the typical pattern of red flags that accompany financial trouble, refer to our collection of public company bankruptcy case studies. With the right data and monitoring process, growing supply chain financial risks can be detected well before a bankruptcy filing.
Supply Chain Financial Distress Should Not Be A Surprise
If we learn nothing else from this supplier's bankruptcy, it’s that deteriorating vendor profitability should come as no surprise. Open lines of communication plus careful monitoring can give you time to mitigate growing risks, and prevent disruption.
The supply chain is subject to many unforeseen risks, but bankruptcy doesn’t have to be one of them. Avoid being blindsided.
Uncover hidden financial risks for critical suppliers: Get a Supplier Risk Assessment
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