Supplier Financial Risk – Suggested Mitigation Strategies From Our Briefing Paper

We have been focusing here regularly on procurement and supply chain risk in the past few months, and we produced this paper on risk at second tier and beyond in the supply chain that you can download. It was written in conjunction with riskmethods, whose risk management platform is used by hundreds of large organisations.

Our latest initiative with riskmethods is a series of short, snappy “Supply Chain Risk Briefings”. They cover some of the most important areas of procurement and supply chain risk – providing a quick overview of the specific risk area, the key impacts that it can have,  and suggesting some approaches that can be taken to mitigate or manage the risk – all within literally two pages.

The first paper is titled “The Most Effective Ways to Mitigate Supplier Financial Risk”.

What happens if a key supplier goes bust, or has major financial problems short of that ultimate event? Will we be able to get hold of the materials we need; will there be shortages; might the firm survive but a new owner play hardball on pricing? It might not be a supplier of goods of course; a shipping company or a services provider with problems can cause just as many issues.

So that is a flavour of the paper, which you can download here; and here is a short extract from it.

 

Suggested Actions and Mitigation Strategies

Monitoring supplier financial health in order to get early indications of suppliers in financial trouble is the other key strategy here. While carrying out financial due diligence at the time of placing the contract is recommended and important, it is simply not enough to mitigate this sort of risk properly. Continuous tracking of suppliers’ situations is vital.

Even using Dun & Bradstreet (D&B) or similar ratings and reports on an ongoing basis will not pick up every problem; there are numerous examples of firms going out of business without any obvious warning signs from D&B and similar organisations. Agencies use historical information to assess financial viability, so when situations change, which they can rapidly, it takes some time for this to be reflected in ratings and reports.

So the best way to manage and reduce this risk is to consider tools that can pick up early warning signs from multiple sources. That applies to both country-level risks, where economic issues will have a knock-on effect on businesses, and company-level issues.  Monitoring senior staff moves and changes or new ownership, taking on debt or signs of other corporate finance activities can all form part of the warning system; even social media can provide clues and evidence of potential problems. These signals do not necessarily result in a bankruptcy or supply interruption, but they could. It is therefore important for buyers to be prepared, take preventive actions and implement proactive risk management.

First Voice

  1. Molly:

    “Monitoring supplier financial health in order to get early indications of suppliers in financial trouble is the other key strategy here” – simple but highly effective.

    For the vice versa scenario, it’s also wise to set up alerts for larger clients who pay on account terms too as there are often warning signs that a client (owing you money) is about to go bust…… It may be too late to prevent what’s been billed but you can prevent them accruing more arrears.

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