Lessons From ProcureCon: How to Disrupt Financial Risk in the Supply Chain
If there's one overarching theme that stands out at ProcureCon, it's innovation.
Whether the topic is disruptive digital technology, or more collaborative business strategies, the challenge is on for procurement to rethink and improve existing procurement strategies.
Among other things, that means thinking differently about risk prevention, especially financial risk in the supply chain.
3 Ways Procurement Can Better Manage Supply Chain Financial Risk
With innovation in mind, let’s tackle a big business problem. Recently, we blogged about growing financial threats to global supply chains. Unfortunately, statistics show that many organizations have a false sense of assurance when it comes to this risk.
While 25 percent of businesses have experienced disruption as a result of a supplier’s financial woes, few procurement professionals prioritize it among their risk management strategy. And while conducting a single financial stability check during the initial sourcing process is common practice, this falls short of what's needed to ensure supply chain resilience, and prevent disruption.
But here’s the thing. Compared to natural disasters and geopolitical wrangling, financial threats are relatively easy to spot. All it takes are some helpful tools, teamwork, and a process to actively monitor the financial health of key partners.
Let’s take a business lesson from ProcureCon, and rethink our processes around financial risk. Here are three ways procurement can better manage supply chain financial risk:
1. The dynamic duo: finance and procurement
As the saying goes, two heads are always better than one. When finance and procurement team up to monitor the financial health of suppliers, each department can play to its strengths.
For instance, when it comes to ongoing monitoring of supplier financial health, consider a cross functional approach. Credit could be responsible for measuring supplier financial risk, as they understand the financial issues more than most. Procurement can continue to focus on sourcing and supplier management.
A collaboration between finance and procurement is especially helpful when suppliers are in a troubled industry, like container shipping. With so many players under financial stress, both teams must be especially vigilant.
Teamwork really does make for a watertight risk management strategy. For real life examples of how collaboration adds value at leading companies, check out our related article, The Dynamic Duo.
2. Ongoing vigilance: Be a rigorous investigator
Considering the buildup of global risks, ongoing vigilance is critical. In industry after industry and country after country, corporate debt is rising rapidly - and so is the threat level. This has elevated financial stress, which can strike anywhere along your supply chain. A proactive approach is needed, before a key supplier implodes.
But it’s not enough to vet only new suppliers. To ensure the financial health of critical supply chain partners, it’s essential to track how their financial health is changing over time, and throughout the relationship. Far too many companies learn this lesson the hard way.
Take the time to look at the financial risk posed, both by your suppliers and their suppliers, so you can anticipate the brittle links in your supply chain. A financial risk metric like the FRISK® score provides a reliable early warning sign of business failure, to give you time to take action.
3. Be a better strategic business partner
To bring supply chain financial stress into focus, know how rising costs and other factors are impacting your critical suppliers’ profitability and cash flow. To do this effectively, communication is key. Talk to your supplier partners about potential sources of stress, and see what role you can play to help alleviate it.
For instance, make sure your company’s payment practices are not harming the very suppliers you rely on. In the ultimate irony, they may need financial relief from your company’s own payment policies.
If your business is using extended payment terms to suppliers in an aggressive bid to manage working capital, become a champion to get them the cash they need. Remind your financial counterparts that it’s cheaper to pay critical suppliers in a timely fashion then to source and vet new ones.
Get ahead of supply chain financial risk
When it comes to uncovering hidden financial risks, a proactive, 3-pronged approach encompassing people, process and technology is best. Here’s a quick recap of the actions to take:
- Diligently monitor your suppliers’ financial health throughout the business relationship.
- Adopt the cross-functional processes and technologies you need to uncover financial risk - and manage it.
- Be a great business partner, and when necessary, bridge the gap between your supplier and your company’s internal payment practices.
With process innovation and the right third party tools, you can fight back against risk, anticipate bankruptcy, and ultimately save your company from a world of hurt.
Prevent supply chain disruption by learning how innovative procurement teams manage supplier financial risk.
Read the article, You’ve been warned: The Overlooked Procurement and Supply Chain Risk
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.