Tips For Detecting Supply Risk Besides Supplier Financials

A couple of weeks back, I interviewed Professor Mark Frolich on a range of topics that were supposed to be focused on finance's view of procurement (a subject of his recent research). But halfway through the conversation, our attention turned to another subject that is both near and dear to our own interests and research at the moment -- supply risk. Candidly, I thought to myself as Mark launched into his supply risk diatribe that this would just be another academic figure coming up with un-implementable theories about how to reduce supply risk. But the moment he started talking about the subject, I realized Mark really knew his stuff and his tips would be absolutely invaluable to share on Spend Matters. Trust me, you'll hear some things here that you probably have not heard of before.

In our discussion, Mark suggested a number of supply risk tip-offs that are often invisible to those who are not looking for them. But they're great leading indicators that something might be amiss. These include situations where a supplier's on-time performance begins to drop, either with or without explanation. Another leading indicator of cash flow challenges is when a supplier decides to close down a facility in the midst of a downturn (regardless of the spin they put on the closing). Two other similar situations that are also tip-offs are when a supplier temporarily shuts down a plant or shifts production to another part of the business (or another supplier on an outsourced basis). Moving to a 4-day work week or rolling layoffs is another tip-off as well (e.g., forcing employees to take off for 3 weeks in a given month, which still allows them to collect unemployment in certain cases but keeps their health insurance paid).

Another telltale risk sign is when suppliers begin to stretch out orders. For example, when a supplier asks if they can move to an every other week (or month) delivery schedule versus more frequent intervals. This tells you that they can't meet production volumes because they've furloughed either some or all of the employees on a shift either on a temporary -- or soon to become -- permanent basis. A similar situation to watch out for is when a supplier shifts production around inside a domestic operation or, in the case of global suppliers, pulls production back to a home country from a local facility (or eliminates on-shore warehousing and other support facilities).

Listening for rumors from those in the industry who also work with a supplier is a critical way of sniffing out tips. But there are also some concrete ways of getting information. For example, if your supplier -- or account rep -- changes an area code or zip code on their phone/billing address this is also a signal of potential distress (i.e., closing or consolidating facilities, eliminating domestic operations, etc.) Granted, it's important to understand legitimate and safe changes (e.g., a corporate relocation or a new facility) from those that signal potential supplier financial challenges, but in this environment, it's always better to be observant and vigilant than sorry!

Jason Busch

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