ISM2017: Why It Pays to Add Supplier Financial Risk to the Agenda
Like many others in the supply chain world, we’ll be headed to ISM2017 next week.
While large public bankruptcies like Westinghouse Electric and Hanjin get splashed on the front pages of financial publications, hundreds of smaller businesses fail but never make the headlines. Yet, there is an absence of supplier financial risk on the ISM conference agenda this year. We’re wondering: why is supplier financial risk missing from the conversation?
Financial failure of a critical supplier is a reality that procurement professionals face every day. According to the SCM World Future of Supply Chain Survey, the financial failure of a critical supplier ranks #6 of 13 threats that keep supply chain leaders up at night. Risks related to cyber-attacks, shipping and logistics disruptions, trade policy changes, and raw material shortages also top the list.
The SCM Supply Chain Survey: Key Risks
By knowing your supplier’s financial health, corporations can avoid the element of surprise that may lead to a complete supply standstill. You know the risks in your supply chain. How can you stay ahead of unexpected failure?
4 Places to Watch for Supplier Financial Risks
While all the risks on the chart above are potentially disruptive, some just can’t be predicted. Fortunately, supplier financial distress is one that can.
The problem is, financial distress can crop up quickly, especially if you’re not watching for it. Here are four areas to keep a close eye on as you manage your sourcing, manufacturing, and distribution network:
- Vendor consolidation: Reducing suppliers in order to aggregate spend is on every procurement KPI list this year. But as you consolidate vendors, keep in mind that potential exposure to a risky supplier increases as you reduce the number of vendors on your short list. Monitoring the financial health of your critical vendors requires additional vigilance as you rationalize your list.
- Late deliveries: Once you observe patterns of late -- or disrupted -- deliveries, it’s too late. By then, you’re working with a supplier who’s already under financial distress. When it comes to developing a resilient supply chain, an ounce of prevention -- including the monitoring of supplier financial health -- is worth a pound of cure.
- Working capital: Many companies are looking to reduce working capital. As a result, extending terms and paying later is more common. But when your finance team expects a critical supplier to act like a bank without taking its financial condition into account, it can put your operation at greater risk. You may have to push back by identifying ‘at risk’ vendors (and protecting them from overly-ambitious DPO plans).
- New Sourcing: In your role as buyer, you’re constantly reviewing sources outside your current supply base to support the innovation goals of your management team. When evaluating long term partners, financial health is a critical component that shouldn’t be overlooked.
How Well Do You Know Your Suppliers / Customers?
Supply chain financial risk isn’t going away. Fortunately, it’s one of the easiest risks to manage.
In fact, adding just two simple tools will help you to detect supplier financial distress, providing the lead time you need to mitigate risks before they become bigger problems:
- A predictive financial risk score, like the FRISK® score, provides an early warning of supplier financial distress
- Automated news alerts help to monitor changes to supplier financial health
When supplier financial risk gets added to the risk management agenda, operational performance improves. Shouldn’t it be on your radar?