Best Practices amongst Vendors providing Supplier Financial Risk Analysis

supply risk

Supplier financial risk is a key challenge for Purchasing organizations.  I believe that conventional financial analysis lacks the ability to predict supplier failure, as it is backwards looking (Information is at least three months old), numbers driven, without the incorporation of qualitative/leading indicators, practically useless for privately held suppliers and weak outside US/Europe (India/China/etc)

Some of the vendors that offer financial risk services, with a focus on predictive financial status, not historical, include:

  • Achilles developed their Financial Analysis Model in consultation with Deloitte.
  • Aravo’s Supplier Risk Management specializes in collecting, validating and maintaining supplier data globally.
  • Beroe provides customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis, and environmental impact.  They have 500+analysts in India and an Expert Network they use as well.
  • Dun & Bradsheet Supplier Risk Manager is modular and anticipates potential risk with D&B’s proprietary predictive supplier failure scores.
  • HICX mostly tries to automate the supplier onboarding process for Corporate Procurement suppliers.  Through this process, they manage supplier information – initial discovery of supplier, onboarding, ensuring data environments are captured, ongoing compliance, risk mitigation.  They can also collect financial risk based news for a supplier segment or collect risk alerts based on financial news for key suppliers.  Most integrate 3rd party information, which is automated through our technology (e.g. RapidRatings, LexisNexis, D&B, etc.) to get credit, financials, bankruptcy, liens, etc.
  • Rapid Ratings corporate clients use them to assess probability of default with their customers, suppliers and investments. They have a purely quantitative proprietary methodology which employs company financials to produce forward-looking analytics prove.  Rapid Ratings is the only firm that rates public and private US and non-US companies on the same basis, and  currently covers over 11,000 public and thousands of private companies in 71 countries across all industry sectors.

Here are a few best practices amongst these and other vendors:

1)     Attempt to do some forward looking analysis and also leverage expert and informal networks to obtain qualitative insight such as:

  • Loss of key customers
  • Lay-offs
  • Facility Shut Downs
  • Regulatory Issues
  • Slow-down in Capital
  • Spend–  Payment Delays to Suppliers

To properly analyze a supplier’s financial situation, it is critical to include an analysis of the overall market for things like Capacity Utilization, regulation impact, labor shortages, product substitutes, etc.

2) Segment suppliers into some risk segmentation (eg. Low, Medium, High Or Critical, Important, Not Important)  and do some on-site verification and third party audits on key ones.

None of the above is easy to do on some private supplier located in Canada or the USA but think about how hard it would be to do in China, India, or Brazil.  But for select suppliers that supply critical ingredients, it may be crucial, especially since the Great Recession woke everyone up to how little a supplier can be that can disrupt a big company’s supply chain.

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