Why Strategic Suppliers Fail – and How to See It Coming
“Usually a public company failure is a train wreck in slow motion.”
— Bill Danner, President, CreditRiskMonitor
Every industry has its leaders and its laggards -- yet neither success nor failure comes out of the blue.
Though supplier financial risk, especially of public companies, is often overlooked, it is common and predictable. Insolvency, in particular, can be anticipated and planned for, if you understand why it happens.
Both strategic and financial factors will affect your suppliers’ financial health over the long-term. To create strong and lasting supplier partnerships, keep a close eye on the following reasons businesses fail.
The Problems of Poor Strategy
UK-based bankruptcy experts from the insolvency trade association R3 studied the top reasons companies fail. The top four relate to business strategy:
Under performance, which most often arises when a market changes and a company hasn’t forecasted accordingly.
Failure of the long-term business strategy, which is typically characterized by an unsuccessful attempt to expand into a new market.
Business mistakes, such as mismanaging inventories or making accounting errors.
Fall in market share, often due to a reduction in marketing.
To determine where your supplier falls on the strategy spectrum, ask: Is your supplier innovative and usually ahead of the curve? Or slow to change and vulnerable to more agile competition?
If your supplier isn’t actively addressing important business challenges, you’ll want to monitor their financial risk carefully.
The Perils of Financial Mismanagement
Of course, a wide range of financial factors can also lead to business financial stress. And as global insolvency risk increases, it reaches all the way down the line – to your suppliers, your suppliers’ suppliers, and so on.
According to R3, the next most common reasons businesses fail are fully financial:
Inability to access affordable financing, when capital markets tighten
Cash squeeze due to late payment by customers, as the need to manage cash increases
Increasing business costs, especially late in the business cycle as demand shrinks, and the ability to absorb overhead declines
Fraud and other unethical business practices
Depending on your supplier’s financial health, any of these factors may cause a financial shock that can’t be easily resolved. You’ll need to consider how well they’re able to navigate the financial challenges associated with growth and change.
Fortunately, the signs of financial distress are usually present well ahead of business failure, if you know what to look for.
How to See Into Your Supply Chain
Visibility into supplier financial health helps you mitigate supply chain risk before it disrupts your operation. Here’s how it’s done:
Keep an eye on industry trends. The industry trends impacting one supplier today may affect others tomorrow.
Watch the cash. When your suppliers have trouble collecting payment, their ability to finance raw materials for your production declines. Watch for operating signals that may indicate cause for concern.
Monitor news and financials. Services that include customizable alerts – plus news, sector indices, financial statements, and more – can shine a light on growing financial risks before you’re blindsided by them.
Perhaps equally important, you’ll want to talk openly with key suppliers about the business challenges they face. A candid conversation about how they’re dealing with financial pressures may uncover ways you can help them weather the storm.
For specific advice on strengthening supplier partnerships and avoiding financial storms,
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.