Lesson From A Takata Bankruptcy: Monitor Supplier Financial Risks
Another potential supplier bankruptcy is in the news this week, reminding us of an operations risk that’s frequently overlooked: supplier financial distress.
There are growing reports that in the wake of the biggest safety recall in automotive history, Takata airbags is searching for a buyer. And to mitigate ongoing liabilities from their faulty product, even after agreeing to pay $1B in fines, Takata may first have to file for bankruptcy.
What's the impact for automakers that rely on Takata for parts, if the company files? And, if one of your major suppliers is financially distressed, will you know?
Supply Chain Impacts From A Takata Bankruptcy
A Takata bankruptcy may disrupt operations. As Bloomberg states: “… suppliers to Takata may withhold shipments on concern that a bankrupt Takata won’t be able to make payment, leading to a disruption in the production of replacement air bags.”
If you were one of Takata’s customers, you may have seen the probability of bankruptcy building and already have plans underway to develop an alternative. But most financially distressed suppliers aren’t high-profile companies, and never make the headlines.
Just to be clear: We’re not saying that Takata’s wrongdoing could have been detected by the strategies we offer below. But we are saying that supplier financial problems can have very expensive consequences, and steps should be taken to avoid supply chain disruption for financial reasons, by tracking vendor financial health and bankruptcy risks. Here's how.
Four Ways To Detect Supplier Financial Risks
With a large and complex supply chain, you can’t just rely on direct observations made on supplier visits, or word-on-the-street hearsay. You need a systematic way to detect and uncover supplier financial risk.
Here are four ways to detect supplier financial distress:
1. Build a Credit-Procurement Partnership
A strong credit-procurement partnership can be a great solution. Just as your company’s credit team monitors the financial health of customers, they can also help the procurement operation monitor supplier financial health.
But here’s a caveat about your risk management process: ‘one and done’ doesn’t really cut it. That’s because when a key supplier’s financial condition worsens, procurement needs time to develop alternatives, especially when long lead times are involved. To assess each supplier’s financial health and get an early heads up when things change, employ a reliable financial risk score and monitoring service.
2. Leverage The Supplier Annual Meeting
In Procurement World, Klaus Lageman suggests that annual supplier discussions are a great time to “… initiate innovation, optimize processes, and identify and assess risks in the supply chain.” In your next supplier meeting, take full advantage of the opportunity to add supplier financial health to the agenda.
And, we’ll go a step further. In our view, a once-a-year supplier conversation about financial health isn’t really enough to detect growing risks. Supplier financial conditions can change quickly … which is why 24/7 monitoring is so important.
3. New Trade Deals Mean New Sourcing Risks … and Opportunities
New trade deals will have you vetting new suppliers, and financial due diligence is a part of that process. But a snapshot of financial health is just that – an assessment of financial health at a single point in time.
As you form these new relationships, it’s also an opportunity to put the right process in place to assess -- and monitor -- the financial health of all new partnerships that are developed.
4. Rethink the Risks Embedded in Your Supplier’s Supply Chain
Nothing throws a monkey wrench into an otherwise efficient operation than the failure of a key supplier. In fact, more advanced procurement teams monitor direct suppliers, as well as their suppliers' suppliers. Learn the process Duke Energy uses to do that, here.
Bottom Line: You Can’t Manage The Risks You Don’t Think About
Unlike natural disasters, labor disputes, or other unpredictable business disruptions, a supplier bankruptcy should never come as a surprise, especially when that company is public.
And according to the research, 25% of supply chains have experienced disruption for financial reasons, but only 22% of firms have a process in place to uncover these risks.
The solution is clear. Put supplier financial risk on your team’s radar, to protect your operation.
To learn how leading organizations manage supplier financial risk, read the Procurement Leaders article, “You’ve Been Warned”.
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 over 58,000 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 $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.