Global Supply Chain Risk Reaches A New High: Pay Attention, Be Vigilant
The grey clouds looming over the global economy aren’t going to pass any time soon. A sharp increase in defaults worldwide, and the fallout from bankruptcies of huge global companies like Hanjin Shipping remind us just how far the waves from a foreign storm can reach.
According to The Sourcing Journal, supply chain risk has reached new highs. An index put out by The Chartered Institute of Procurement & Supply (CIPS) is at the highest level since 2013, driven by a volatile global political and economic climate. As well, the IMF has lowered global growth projections, warning of higher debt levels worldwide.
As a result, your supply chain partners on the other side of the globe may be hurting. If you’re not monitoring their financial health, the impact could be far worse than a few late deliveries.
Today, we look at four important financial trends to put on your radar, to avoid disruption.
Rough seas for shippers ahead
Late August 2016 provided thousands of global businesses with a rude reminder of financial risk in the supply chain. When the world’s seventh-largest container shipper filed for bankruptcy, cargo belonging to thousands of companies was stranded at sea.
Unfortunately, financial stress in the troubled shipping industry reaches well beyond Hanjin Shipping, and bankruptcy risk has gotten dangerously high for many other companies. The beleaguered industry is expected to return to profitability sometime in 2017-18, but not before more firms fail due to pricing pressure and excess capacity.
For instance, according to our research, the FRISK® score for Yang Ming MTC fell from 4 to 2 between November and December 2015, and bankruptcy risk is elevated at many other shipping companies.
Do your due diligence on shipping companies in your supply chain, to prevent disruption and keep your goods flowing freely to market.
Debt piles up in China, while growth slows
When we think of international trade, it’s impossible not to think of China. The manufacturing powerhouse has become synonymous with overseas sourcing.
But while demand for Chinese output has fallen in the wake of slower global growth, corporate debt in China has risen at an alarming rate. According to the IMF, China’s window to deal with this growing debt problem is “closing quickly”. The debt at risk is estimated to be around 15.5 percent of the corporate loan total, with potential loses hovering around seven percent of China’s GDP.
As these economic forces play out, some supply chain counterparties will grow riskier. Vet your suppliers more closely, to figure out who is at risk.
Longer payment terms stretch suppliers
The growing practice of stretched payment terms may be straining vendors along your supply chain. Imagine waiting 90 days to get paid, yet still having to honor invoices within 30? Yet, this is the reality for an increasing number of global businesses.
Whether caused by the prospect of rising interest rates, or just a desire to manage working capital better, when suppliers get caught in a liquidity squeeze, it becomes your risk.
And while you can’t influence payments terms outside of your own supplier/buyer relationships, be proactive if you learn that your company has inadvertently become a source of financial stress. Talk with suppliers to identify who is suffering from a cash crunch, and take steps to help mitigate this risk. Ensuring that your vendors get paid sooner is far easier than having to replace a bankrupt supplier.
The foreign currency roller coaster
Currency volatility is another risk to supply chains across the world. The U.S. election, Brexit, changing trade deals … all of these economic and political forces disrupt currency markets, and your global trading partners could be taking a hit.
The difficulty with currency fluctuations is that you can win one day and lose the next. It’s this very uncertainty that exposes your suppliers to heightened risk; suddenly they can find themselves having to renegotiate prices, facing higher costs and a profit squeeze.
Fluctuating currency markets are another reason to monitor supplier financial health closely, to spot the early warning signs of a company in financial distress.
What risks are looming in your supply chain?
These factors make it absolutely clear why it’s essential to monitor the financial health of suppliers. Yet, while 25% of supply chains have been disrupted due to financial reasons, less than a quarter of companies monitor the financial health of key suppliers.
Don’t be one of them. Within your organization, there are steps you can take:
- Create a strong partnership between procurement and finance.
- Keep an eye on company financials, and be diligent about both vetting and monitoring critical suppliers.
- Learn which third party tools and processes can help can help your company avoid growing financial risks.
For real life examples and strategies on how leading companies stay ahead of supply chain financial risk, download the Procurement Leaders magazine article, “You’ve Been Warned”.
Discover the overlooked financial risks in your supply chain: Download the article, “You’ve Been Warned”
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