Contagion in the Supply Chain – advice from an insolvency professional

Nick Hood, Business Risk Analyst at Company Watch, was one of the standout speakers at eWorld on March 3rd. Nick has spent the past 25 years working as a business rescue professional, mainly in the SME sector, tidying up the mess that financial errors and supply chain disruption have made. He talked to us about the impact of global events on the supply chain, drawing on his wealth of experience as FD and CEO of listed construction and logistics companies and as an international insolvency practitioner. Of course a lot has changed since March 3, but his thoughts on the importance of soft skills in a crisis are still well worth taking away.

The ripple effect of failure in the supply chain is every procurement professional’s nightmare, he said, and explained how dangers can be spotted, contained and, ideally, prevented. But he began by asking very honestly: can we really mitigate risk? Can procurement really have any impact, despite what the risk management software vendors tell us? Is the best we can do is have a backup plan?

There are some things we can do that will make a difference:

You cannot look at supply in a one-dimensional way. The countries most affected by China’s break in intermediate (not finished) goods exports are South Korea and Japan, China’s satellite manufacturing operations of Cambodia, Vietnam etc., followed by the US then the other major economies. You cannot relax just because your supplier is not in China or Japan. What if your supplier is in India or Australia?

Asian factories risk supply disruptions more than most, many are relying on intermediate goods from China. On the home ground, the curve ball is that many UK suppliers are owned by an Asian corporation. Company Watch is about to publish figures on foreign ownership of companies, in five years UK Asia-owned companies have risen by 44%. If your UK supplier is Asia-owned will it get the support it has had and will it continue to be trade-insured? These are the questions we need to be asking ourselves. Four of the top ten firms by turnover size are Asia-owned.

You need also to consider the profile of a supplier, and the ideal one is solid on profits, low on borrowings and has a good balance sheet. But what he calls a ‘water skier’ is one where the profits are not supported by the balance sheet. If profits don’t continue, there’s nothing to hold the company up. It’s an accident waiting to happen.

So you need to think about the substructure of your suppliers, find out what dangers might be lurking in the firms that make up the supplier firm. Find out whether their figures are up to date; if they are a year old, that should signal concern. You need regular, timely figures from suppliers’ managers. But remember you can’t rely on forecasts and budgets – if a huge firm like BA can’t forecast profits, how can a West Midland SME for example?

Then you need to do your own modeling. What if costs rise? What if revenue falls? And model for that if activity levels rise. If you have two critical suppliers, and move business from one to the other, they might risk failure from overtrading, not from a drop in sales, as they don’t have the flexibility to cope with a surge in business. So model down and up.

But remember – the bottom line is this: what will influence your supply chain is not the numbers but the people. How they behave and deal with a crisis can make or break the failing. So look for management team behaviour: how they deal with dips and manage growth; how have they previously dealt with breaks in supply (not just predictable events); have they got business continuity insurance, and a contingency plan? Those are the questions to ask your suppliers. And maybe even: how do they plan for a once-in-a-century pandemic that can lead to chaos? You need to know what the people are like who are dealing with the crisis in your supply chain.

One person you must absolutely know about is the CFO. Is that person a gatekeeper or a visionary? Will they spend extra money on a resolution?

So (in normal circumstances) meet the people. Go to their premises. Look at the relationship – is it process driven? Have conversations with the key people, and make sure they understand what you are really saying – it’s essential to have a two-way conversation to make anything happen because …

... it’s the people who will sort your problems – not the numbers.

Listen to Nick's session in full here

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