The 3 Best Times To Think About A Supplier's Financial Health

Three best times to detect growing supply chain bankruptcy risk

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

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.