Supply Chain Financial Risk: Is It On Your Radar?
If you’ve never had a supplier go bankrupt -- or if it’s been awhile -- you probably haven’t spent much time lately thinking about this risk.
In that case, the recent bankruptcy of Westinghouse Electric provided a $9 billion reminder that supplier financial risk is very real and omnipresent.
The fact is, scores of publicly traded companies file for bankruptcy each year. And while less headline-worthy, many smaller failed pubic companies are just as disruptive to their supply chain counterparties as Westinghouse Electric was to theirs.
If you’re like your procurement peers, sooner or later a financially distressed supplier will negatively impact your operation. That’s why managing supplier financial health is critical to your team’s performance.
Isn’t it time to get a handle on the financial risks for your critical suppliers?
Protect your operation from disruption. Get a Critical Supplier Financial Risk Assessment
Supply Chain Financial Risk By The Numbers
First things first: let’s look at bankruptcy risk by the numbers, to put this risk in perspective:
- 178 publicly traded companies failed over the last two years, with a combined asset value of $104.6 Billion. (Source: bankruptcydata.com)
- While 44 of these publicly traded companies joined the ‘billion dollar bankruptcy club’, roughly 80% were under $1 billion in assets. (Source: bankruptcydata.com)
- 37.8 thousand U.S. businesses failed in total last year, an increase of 26% over the prior year. (Source: American Bankruptcy Institute)
Yesterday’s bankruptcy statistics may be in the rear view mirror, but the next one -- and the one after that -- is just over the horizon. Problem is, you may not know which of your suppliers are most at risk.
Fortunately, there are some easy solutions for that.
5 Strategies to Manage Critical Supplier Financial Risk
Here are five simple strategies that help you ward off disruption:
1. Join Forces With Your Finance Team
As the Deloitte Global CPO Survey pointed out recently, credit and procurement can join forces to prevent disruption -- it’s a natural alliance. By teaming up with a financial partner to manage supplier financial risk, the supply management process is strengthened and operational risks reduced. For strategies to develop this natural partnership, here are two helpful resources:
- Procurement: CFOs’ Right Hand in Managing Costs, Risks and More
- The Dynamic Duo: How a Procurement-Credit Partnership Can Reduce Supply Chain Risks.
2. Supplier Audits, Scorecards … and Monitoring
For most sourcing teams, a supplier performance review is scheduled every year or two. Problem is, financial health should be evaluated more frequently. Why? Because business conditions change constantly. Especially as the Fed raises rates, the refinancing risk increases, increasing the financial stress on your already highly leveraged suppliers. While in-depth supplier audits and scorecards are great, when it comes to supplier financial risk, 24/7 monitoring is best practice.
3. Tools of the Trade
As has been reported in many quarters, technology is reshaping the modern supply chain. In addition to third-party tools that help you to manage supplier cost and logistics, consider the value of a reliable bankruptcy risk score to assess supplier financial condition, and ongoing financial risk monitoring to alert you to financially distressed suppliers while there’s still time to regroup.
4. There’s No Substitute for Supplier Visits
Technology is great, but for key suppliers, face-to-face visits can tell you what other reports may miss. And when you make your visit, you’ll want to look for old school signals. If the parking lot isn’t crowded, the factory isn’t busy, shipping docks are quiet, and there aren’t a lot of raw materials in their warehouse, it’s a sign that requires your attention. Keep critical supplier visits on the calendar.
5. Downstream Risk, From Your Supplier’s Suppliers
In last year’s webinar with Steve Ruger, Vendor Materials Manager for Grid Modernization at Duke Energy, he offered various advanced strategies to detect supplier risk -- among them, looking beyond critical vendors to their business partners, three and four levels down. It’s a lot of work, but one that pays off -- and another reminder that when it comes to supplier risk management, an ounce of prevention is worth a pound of cure.
Apathy: The Biggest Supply Chain Disrupter Of All
Procurement financial risk is a major business disrupter, regardless of industry. Reportedly, it affects one in every four procurement organizations every year.
But in the article The Overlooked Supply Chain Risk, Procurement Leaders magazine uncovered a bigger problem: while up to 25% of supply chains have experienced disruption for financial reasons, only 22% of firms have a process in place to uncover these risks. (Source: Achilles Supply Chain Consulting
The key lesson? Business failure is predictable -- and with the right processes in place, supply chain executives can get an early warning, and develop a contingency plan in time.
A Supplier Financial Risk Assessment Can Help
Avoiding costly disruption is a high priority, and precautions must be taken.
Fortunately, there are low-hanging solutions that are simple to execute, and we can help. It starts with a financial risk assessment for your public company suppliers; supported by an entire toolkit designed to help you manage supply chain financial risk.
If you’re ready to get a handle on this critical supplier risk, we hope you’ll get in touch.
Put supplier financial risk on your radar. Contact us for a supplier financial risk assessment
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 $130 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.