Managing Supplier Financial Risk – First Briefing Paper In New Series

We have been focusing here more regularly on procurement and supply chain risk in the last few months, and we produced this paper you can download as well as contributing to a really worthwhile webinar (which you can still access here). This is a vital topic, and one that our friends (and sponsors) at solutions provider riskmethods obviously think about constantly.

Anyway, we’re now kicking off a new initiative with riskmethods – a series of short, snappy “Supply Chain Risk Briefings”.  They will cover some of the most important areas of procurement and supply chain risk. The idea is to give a quick overview of the specific risk area, identify the key impact that it can have, perhaps give a couple of short case study examples, and suggest some approaches that can be taken to mitigate or manage the risk – all within literally two pages.

And just to re-assure you; the paper is not a sales pitch for riskmethods. Whilst clearly the firm does market a platform that supports better risk management, we don’t even mention this in the paper; we’re looking at these topics independently as always.

The first paper is titled “The Most Effective Ways to Mitigate Supplier Financial Risk”. Most of us with a bit of experience in procurement know that sinking feeling when you get the phone call from a supplier to say “we’re in trouble” or even “we don’t exist anymore”. Of course, it is usually even worse if you don’t get the phone call and the first you know of it is reading about it in the paper or on a website! And yes, that has happened to me in the past …

So what happens if a key supplier goes bust, or has major financial problems short of that ultimate event? We probably think immediately of supply shortages following a key provider of raw materials, components or “direct” goods of some sort disappearing, but the impact if it were a shipping firm or a supplier of outsourced services could be just as severe. These are the sort of issues we discuss, and here is a short extract to give you a flavour of the briefing.

Consequences for Customers  

Supplier problems in this area can lead to a number of negative risk events for customers.

Lack of immediate direct supply – the most obvious risk is simply that supply is no longer available because the supplier ceases to trade. This can be very sudden and unexpected, triggered by a single event or it can be the result of a long series of issues or decline. Supply interruption in terms of goods (raw materials, components and so on) is probably the most frequent occurrence, but there can be issues with services too. Outsourced service providers in many sectors can be critical suppliers for some customers. The bankruptcy in 2016 of Hanjin shipping company demonstrated that providers of services can certainly be the source of major risk problems.

Commercial risk through non-adherence to contracts – there is evidence that some firms have used bankruptcy or potential bankruptcy to get out of onerous contracts. In a case in the automotive industry a few years ago, FormTech filed for Chapter 11 bankruptcy with a new owner, HHI, already lined up. As Automotive News reported: “But HHI opted not to assume agreements with Chrysler Group, Ford Motor Co., General Motors, Toyota Motor Corp., 11 Tier 1 suppliers, and others. According to sources close to the situation, nearly all of FormTech's customers were forced to the negotiating table to work out new long-term supply agreements as a condition to continue receiving parts in the short term”.

 To read more, download our briefing here.

 

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