On Supplier Risk Management, Financial Health Scores and Bad Lettuce

While the scramble to identify the Yuma, Arizona-based romaine lettuce supplier(s) that is the source of the ongoing E. coli outbreak continues, a new and rather apropos report from A.T. Kearney and RapidRatings shows that companies are taking supply chain risk management more seriously.

The majority of both average and leading procurement organizations expect to be given more risk management responsibility in the next two years, the report finds. Considering that 83% of all companies believe that it will be increasingly crucial to implement a procurement risk management strategy within the next few years, it is not surprising that many are investing in risk management techniques.

If there is one simple factor that separates how procurement leaders approach risk management from how average organizations do so, it is that the former makes use of a wide range of techniques. A.T. Kearney finds that advanced procurement organizations are significantly more likely to have “systematically used” a number of risk management practices, compared with their average counterparts.

For instance, 70% of leading organizations have conducted a risk impact analysis, versus just 21% of average organizations. More than half of the leading organizations have used practices such as financial risk management, value chain modeling, supply chain visibility and preferential access to supply, whereas only 10%–26% of average organizations have done so.

Spotlight on Financial Health

The RapidRatings FHR, a financial health rating ranging from 0 to 100, can be used as a proxy for measuring company risk. Looking at the chart below depicting the peaks and troughs in companies’ FHR scores, we see that 2017 has been below the decade average across all categories.

Disaggregating down to individual supply markets, the report finds that the worst-performing markets in 2017 were oil and gas drilling, metals and fabrication, and equipment and producers. In contrast, the markets with the highest financial health included automotive and retail.

In 2017, financial health was on average lower and supply risk generally higher in BRIIC (Brazil, Russia, India, Indonesia and China) and other emerging markets. Looking at BRIIC countries more specifically, suppliers in China and Brazil had the lowest financial health scores, and the latter also experienced the biggest decline. In comparison, Russian and Indian firms had much higher financial health scores.

After Russia and India, the supplier markets with the highest financial health in 2017 were Mexico, the Philippines and Malaysia.

For the full results on financial health by supply market and country, check out the report here.