Five Strategies to Mitigate Supplier Financial Risks

Supply chain strategies to mitigate financial risk

Imagine arriving at a critical supplier’s warehouse, only to discover padlocks on the doors and no material coming out. It happened to one pharmaceutical firm we know, and likely many other businesses who overlooked their suppliers’ financial risk.

Clearly, supplier insolvency and supply chain disruption happen. In fact, a study conducted by the global consulting firm Achilles showed that 25% of businesses were affected by the financial failure of a supplier in the previous year.

Yet supplier insolvency only becomes a serious problem when it takes you by surprise, and the effects can’t be contained. That’s where supply chain risk management comes in.

5 Ways To Be Proactive

Good supply chain risk management isn’t just about spotting financial risk, though that’s a big part of it. Effective supply chain management is also about building resilience into your supply chain, to ensure continuity when the worst happens.

Fortunately, procurement managers have many powerful strategies to mitigate supply chain financial risks before they disrupt your entire business:

1. Diversify Suppliers

Establishing alternative sources for critical materials is an often-used way to reduce your dependency on key suppliers. Though it may also limit your ability to negotiate the most favorable terms with any one of them, be proactive and begin identifying multiple potential suppliers before you need them.

2. Switch Suppliers

Once you uncover financially stressed suppliers, reduce your reliance on them. It can take six months to find and qualify an alternative supplier, particularly in specialized or highly regulated industries.  But a continuous process of managing away from “at risk” vendors will avoid headaches later.

3. Stock Up

If your supply chain is disrupted, having sufficient inventories on hand can provide needed time to recover. Maintaining higher inventory levels of critical materials ties up working capital, but also provides operational flexibility.

4. Pre-Pay

When forecasts go up and down and orders fluctuate, your critical suppliers’ cash flow is affected. This impacts their ability to deliver. You can help a cash-strapped supplier – and ensure uninterrupted deliveries—by offering some form of prepayment. Options include reverse factoring, purchase order finance, or procurement cards. It may take a little time to put these in place, so plan ahead.

5. Invest in the Supplier

Some companies create partnerships with, or even invest in, financially troubled critical suppliers in order to keep them viable. This is especially common when the supplier has a proprietary process or specialized skillset. These deals can take many forms, but all will require a coordinated cross-functional effort led by those who know the sourcing options best.

Apply Advanced Strategies

Sophisticated procurement pros also use more advanced strategies like supplier score carding, industry benchmarking, and supplier audits to manage supply chain financial risks. The best even monitor sub-suppliers for downstream visibility. That way, they won’t be caught off guard if a supplier three or four levels down files for bankruptcy, even if their primary suppliers are.  

For more hands-on strategies to get ahead of supply chain risk, watch “The Intersection of Credit and Supply Risk: A Practitioner’s Perspective”. In this educational “on-demand” webinar, supply chain risk expert Michael Forbes, former Director of Corporate Supply Chain Risk at Northrop Grumman, discusses practical ways to reduce risk.

Watch the webinar: “The Intersection of Credit and Supply Risk: A Practitioner’s Perspective” 

Managing Supply Chain Risk, In A Fast-Changing World

All these tools, metrics, and warning systems are useless if you’re not ready to actively mitigate the risks you uncover. To ensure supply chain resilience, use all the information at your disposal to accurately evaluate the financial risk of critical suppliers. Then create a plan of pre-emptive action to avoid supply chain disruption.

To learn how leading organizations uncover and mitigate supplier financial risk, check out the informative article in Procurement Leaders magazine. You'll hear from the procurement and credit teams that employ these strategies to manage risk, and much more.

Read the Procurement Leaders magazine article: You've Been Warned

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