Why You Have to Expect the Unexpected From Your Supply Chain
When a supplier your operation is dependent on suddenly faces financial distress, it may start to prioritize other customers at the expense of your business, or it may go bust outright. As a result you may end up having to deal with a disruption in the supply of a core business component, causing a ripple effect throughout your business. There is also the risk that a supplier may suddenly raise its prices during the contract term, (if a price adjustment clause in the supply contract enables this), and, as a result, your profit margins will get thinner.
With hindsight, companies will wish that there was a way to know about these difficulties in in advance, so that you could start contingency planning earlier or maybe not even have selected the supplier at all.
A Warning Sign…
The information market has numerous offerings to provide indicators of company financial health. These indicators can be used in forming an opinion about supplier financial health, and as a result, your interactions with them. For a more bespoke solution, your procurement department should be able to produce these analyses. Whichever way you choose to do this, the financial health indicator should enable you to assess the likelihood of the supplier facing financial distress during the contract term.
It’s not enough, however just to have this information about the financial health of your supplier base. This information must be integrated into your spend intelligence reporting to provide a single source of intelligence.
Organizations should be aware, however, that integrating information from an off-the-shelf information solution to your spend intelligence report may be legally problematic, because it involves third-party intellectual property rights. However, your own bespoke indicator would be safer in this instance.
Your integrated spend intelligence report should show the most recent financial health indicator for each supplier (at least) in the High Impact/High Spend (A) and High Impact/Low Spend (B) segments of the spend intelligence matrix (for an introduction to spend intelligence matrices, please see my previous posts.
The integrated report should show how much of your total spend goes to financially unstable suppliers. You should then be able to produce a statement from the report similar to this: “Approximately 76% of our total spend goes to suppliers that have a high impact on our production process or service delivery, and out of this spend 25% goes to suppliers who are currently showing signs of financial distress”.
Provided that you use a timely and accurate financial indicator, this would provide a wake-up call for Procurement to start contingency planning. In my opinion, it’s never too early to start, and it should be something that is continuously monitored.
In these economically hard times, can you afford not to integrate supplier financial health signals into your spend intelligence?