Supply Chain Financial Risk: 7 Key Learnings from the Hanjin Shipping Bankruptcy
The recent Hanjin shipping bankruptcy dramatizes what happens when a critical link in the supply chain fails. Operations disrupted, retail plans jeopardized, and costs can spike an extra 50% or more, just to get goods moving again.
While Hanjin may be the largest global shipping company to fail, and financial stress in shipping is way up, no industry is immune. Global supply chain financial risk is way up. It's higher than at any time since the last financial crisis, affecting companies in every industry.
Here’s the story of one global company whose procurement process was inadequate to protect them from the Hanjin bankruptcy, and seven learnings to help you manage your own supply chain financial risks.
Cautionary Tale: A Global Manufacturing Company Gets Burned
We know of one global manufacturing company that was completely blindsided by the Hanjin bankruptcy. Here's why.
They routinely put out an RFP every spring for the next year’s shipping contracts, but unfortunately, when reviewing bids, assessing financial strength wasn’t a part of their process. Were the RFP bids evaluated through a financial risk lens, Hanjin’s would not have been accepted. They’d have seen, for instance, that Hanjin Shipping had a FRISK® score of “1”, with a very high risk of failure, even last spring.
This supply chain disruption was completely avoidable. What's worse, this manufacturing company is not alone in missing a key step in the process. In a recent survey of 450 procurement professionals, 22% of businesses didn’t even have the most basic financial reports for their main suppliers. (Source: Achilles consultancy)
7 procurement lessons from the Hanjin shipping bankruptcy
Here are 7 lessons that may help you tune up your own procurement process:
1. Black Swan” vs. “White Swan” Events
Unlike certain hard-to-predict, rare events like natural disasters -- so-called “black swans” -- business failures occur regularly. In fact, 25% of businesses had been affected by the financial failure of a supplier in the past year, but this risk is routinely overlooked. Fact is, business failure is predictable, and with the right financial risk detection process in place, supply chain executives can get an early warning, develop a contingency plan, and avoid disruption. (Source: Procurement Leaders Magazine)
2. Adding financial risk to the sourcing process
According to a 2014 study by the University of Tennessee’s Global Supply Institute (LINK,) the No. 1 strategy used to mitigate supply chain risk is to choose financially strong suppliers in the first place. Since it can take years to develop a critical supplier, procurement needs to keep a finger on the pulse of financial health throughout the sourcing process.
3. Ongoing monitoring, with current financial information
Vendor financial health can’t just be checked once and forgotten. Some companies assess this annually, but a once-a-year risk assessment is nothing more than a snapshot, frozen in time. Walking through a factory to see if it looks busy, or talking to your procurement peers isn’t enough, either.
Financial risk is fluid, conditions change. Best practice is to monitor all suppliers using current financial information, to make sure financial health hasn’t deteriorated. A FRISK® financial risk score in the dangerous “red zone” is a telltale sign of impending financial trouble.
4. Update the 'procurement playbook'
In the case of the manufacturing company we described earlier, a very expensive event could have been avoided, had assessing financial risk been part of the procurement playbook. But sadly, the evaluation of financial risk was left to a mid-level purchasing manager who had no idea how to evaluate bankruptcy risk -- it wasn’t even on her buying decision radar!
Develop and publish a financial risk management process, and make sure that the entire purchasing group is using it.
5. Consider a Procurement-Credit Partnership
When it comes to managing financial risk, procurement doesn’t have to go it alone. A credit and procurement partnership is worth exploring. In many companies, the credit and collections team helps to assess suppliers and prospective suppliers. For instance, procurement can submit their supplier portfolio to credit, who can monitor it with the same frequency (i.e., monthly) and scoring used to evaluate customers. Whether procurement, credit or a shared process -- Someone MUST monitor supplier financial risk to avoid disruption.
6. Don't Overlook Your Suppliers’ Suppliers FInancial Health
The supplier scorecard at companies like Duke Energy not only includes a FRISK® score for suppliers, they also evaluate the financial health of their suppliers’ suppliers. Assessing the financial strength of your suppliers’ sources-- at least the most strategically important ones -- helps to minimize the risk of disruption. Include this in your process, and gain your suppliers’ assurance that they have a process to monitor their sources' financial health.
7. Foreign suppliers have add additional risk
Financial transparency and reporting varies country to country. When interpreting a financial risk score, these local differences must be factored in. But with a sound process to detect changes to supplier financial health, and a reliable predictive risk score, you can protect your operation.
Learn how to put financial risk on your radar, and prevent disruption before it occurs. Read the Procurement Leaders Magazine article, “You’ve Been Warned”
And, learn the signs you should look for when examining a supplier that stands at a heightened risk of financial distress. READ A POST-BANKRUPTCY ANALYSIS OF HANJIN SHIPPING CO.
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