Supplier Insolvency Is on the Rise: Learn How to Protect Yourself
Catastrophic supply chain disruptions caused by natural disasters are rare, but they sure grab plenty of news headlines. Who hasn’t heard horror stories about the economic repercussions of Japan’s March 2011 tsunami?
These dramatic events never fail to capture our attention. Yet we often overlook a much more common supply chain threat: financial risk.
Do You Monitor Your Key Suppliers’ Finances?
Overlooking supplier financial stress is dangerous business. A distressed supplier can bring your production line to a standstill, limit your ability to meet customer commitments, and ultimately, threaten your company’s financial health.
Some procurement pros consider monitoring supplier financial risk to be the responsibility of their finance department. But with the right tools, it’s actually pretty easy to get a handle on it yourself. Considering the potential consequences, it’s critical to do so.
Financially Distressed Suppliers: What’s the Risk?
Supply chain financial risk sometimes flies under the radar, but is much more prevalent than people think. The global supply chain risk consulting firm Achilles found that 25% of businesses were affected by the financial failure of a supplier in the previous year. Worse, global bankruptcy risk is now 55% greater than right before the financial crisis of 2008.
Spotting – and planning for – a supplier’s impending bankruptcy can mean the difference between operational resiliency and disruption. But remarkably, only 22% of businesses maintain even basic financial records on their suppliers.
We can’t really explain why more businesses aren’t proactively monitoring the financial stability of their suppliers. But we do know this: After years of economic stimulus, companies are overloaded with debt, and business insolvency is growing.
Supplier Insolvency Stories Abound
Supplier bankruptcy filings occur all the time. If this all sounds a bit alarmist, consider these real-world examples:
- In the automotive industry, bankruptcies more than tripled during the last financial crisis. 60 suppliers went under, wreaking havoc with that industry’s supply chain. (Source: Supply Chain Quarterly)
- 87 global companies defaulted in the first 6 months of 2016, the highest tally since the last financial crisis. (Source: S&P Global Market Intelligence)
- Recently, a pharmaceutical firm relied on a particular supplier for a critical ingredient, only to suddenly discover “there are padlocks on the doors and we can’t get any material from them.” (Source: Procurement Leaders)
Supplier bankruptcy doesn’t have to catch you off guard. One Canadian electricity generator and supplier regularly uses third-party tools to monitors trends that point to insolvency. If they choose to do business with a supplier that’s in questionable financial health, “additional guarantees are contractually required to mitigate any financial inconveniences.”
Advance Warning Limits Damages
Clearly it’s better to be proactive than reactive. With a timely warning of a supplier’s imminent bankruptcy, protecting your company from the downside becomes easier.
Identifying where the greatest risk resides – within the thousands of suppliers that make up your value chain – is the key. To do that, you need the right tools. The FRISK® score, for instance, boils all available data down to one manageable, predictive metric for public companies.
When it comes to supply chain financial risks, lack of knowledge is the real danger. Forewarned is forearmed.
Managing Supply Chain Risk, In A Fast-Changing World
Learn how leading procurement teams predict and manage supplier financial risk, including hands-on strategies to mitigate financial distress in your most critical suppliers. Read more in this in-depth article from Procurement Leaders magazine:
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