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Why supplier financial health is vital to supply chain resilience 

Because of the COVID-19 disruption on supply chains, executives are now investing in initiatives to strengthen supply chain resilience. Programs focus on broadening the depth, diversity and stability of their supply chains to ensure continual business operations. However, today supply chain risk management programs are largely manual and companies are underutilizing a critical tool in supply chain stability — financial health checks.

Recently, world events have introduced a significant amount of new financial risk into the supply chain. Many vendors and suppliers are having financial difficulty which can interrupt their service levels, quality and safety. To maximize company uptime, companies should assess the fiscal health of their suppliers, especially ones that they are dependent upon. The loss of service from a critical vendor can equate to disruption in operations, or a company scrambling to source a backup supplier last-minute which can bring risks of its own.

Supplier financial health is also changing rapidly, especially as different regions and states implement various COVID-19 rules and regulations that impact their businesses. Many suppliers are facing business struggles and may not be able to uphold financial obligations such as managing their cash flows, paying contractors for services, or fulfilling contract commitments.

The good news is that companies can now manage this supply chain risk in an automated and real-time fashion. By continually assessing supplier and vendor financial risk, you can put mitigations in place to minimize disruption. Proactive measures could include sourcing new vendors in a high-risk supplier segment, reducing work until the vendor starts to recover, or renegotiating contracts and service levels that fit the supplier’s current capability.

A financial health assessment helps determine how fiscally stable — and therefore how reliable — a supplier is, which ensures better supply chain resilience. By identifying risky suppliers, you can avoid violated contracts, credit damage and project delays. Here are some of the key reasons it’s critical to perform financial health assessments with contractors.

Promote reliable suppliers and mitigate risky ones

The first step is to identify essential attributes of trusted and reliable suppliers. As you gather key financial metrics and information about the suppliers you are using, you can minimize services to companies that are dealing with bankruptcies, liens, judgments and other red flags. A vendor might not have any black marks on their record historically, but they may be showing indicators that they are more likely to default on financial obligations or services in the future.

Conversely, you can also identify vendors with positive safety and financial health attributes, in addition to a strong safety record. Questions you can answer include: Does the contractor have a solid history of regular payments? Has this supplier successfully fulfilled contracts recently? How many active commercial accounts do they have? By finding several vendors that meet these criteria, and capitalizing on their services more, you will build more resilience and reliability in your supply chain operations.

Make real-time, data-based decisions around critical contractors

With so many contractors in the market, it’s easy to get overwhelmed by the sheer number of options and many manual programs have an inability to scale their supply chain risk management efforts. However, an automated financial health assessment gives you the data you need to make real-time proactive decisions. Companies can easily search and sort through a large database of vendors, identifying stable suppliers to add to their supply chain programs to build up long-term resilience. In addition, critical suppliers can be continually checked to ensure there are no new risks developing during these challenging economic times.

These health reviews on vendors offer both detailed and insightful information about their fiscal health and operations. Information that contributes to a high or low risk score can include credit reports and history, public records, delinquent records, payment performance, credit amounts, legal filings, insurance lapses and more.

This type of real-time information empowers supply chain managers to make proactive decisions that will increase business and operations confidence.

Strengthening your supply chain, strengthens your reputation

The risks of depending on an unreliable vendor can be devastating. But a financial risk assessment with a strong supplier safety management program ensures reliable company delivery. This ultimately leads to brand trust and credibility in the marketplace. By choosing reliable and trustworthy partners, a company extends their brand reputation to their customers and shareholders. These measures will increase business confidence, protect service delivery, and improve company growth and brand reputation.

Financial health assessments should be a critical part of your supply chain risk management programs. Avetta’s partnership with Experian helps hiring clients with this essential screening. Through Avetta’s Financial Risk offering, every supplier in the Avetta network can receive financial ratings based on key metrics unique to their business financials. Clients can review these ratings at both an individual and group level to establish new compliance rules and drive new levels of supply chain resilience.

To see case studies about financial risk assessment and get tips for evaluating financial health, view this white paper now. For information about Avetta’s financial health assessment offering, get more details here.