By the time a credit rating agency downgrades one of your key suppliers, is it too late?
Much has been written on the failure of Carillion and the cascading consequences of its recent insolvency including thousands of sub-suppliers losing money. In hindsight, there were a number of signs that showed the facilities management and construction company was struggling, including three profit warnings last year (July, September and November).
Yet, it appeared that it was business as usual as Carillion’s customers continued to buy from the company, and suppliers to Carillion continued to provide goods and services until the employer of 40,000 people went into compulsory liquidation on January 15, 2018.
So, what could Carillion’s customer and suppliers have done differently to prepare themselves? I have provided three suggestions that you may want to consider if you are concerned about the financial stability of companies you’re buying from.
Recognize the limits of traditional information
Procurement professionals usually rely on a company’s credit report as an initial foundation to assess the financial stability of suppliers. These reports typically give an aggregated view at a high level of holding / subsidiaries companies, revenue, payment history, directors, and are available from providers such as:
- Credit rating agencies include Moody's Investors Service, Standard & Poor's and Fitch Ratings
- Information brokers include Bureau van Dijk, Creditsafe, Dun & Bradstreet, Equifax and Experian
- Free public sources such as the UK’s Companies House and EDGAR in the United States
A complaint that we often hear from customers is that these sources of information can be out of date by as much as 18 months, and expensive to use when looking for greater levels of granularity. Another challenge is that the information isn’t usually integrated into an existing supplier information management system or analytics platform so the process of benefiting from the information is a manual, resource intensive effort.
Although these third-party sources are still an essential part of assessing a supplier’s overall health, it is increasingly dangerous to rely solely on credit reports to understand supplier risk.
Get closer to suppliers
Most procurement professionals try to mitigate risks by closely monitoring the performance of their suppliers, but this is often approached as a punitive measure to phase out underperforming suppliers. By engaging with suppliers more proactively throughout the lifecycle of a contract, you will be able to truly understand, and perhaps anticipate, risks before they escalate and impact your bottom line.
The downside of this approach is that it, too, can be labor intensive, as establishing supplier performance scorecards and maintaining supplier management dashboards may seem to require more time chasing suppliers than what might be possible with your limited resources.
For supplier performance management to truly deliver, it’s essential to create a transparent relationship where suppliers are free to self-report and submit performance data, reducing the burden on your team to collate information. Although this is generally a significant shift in supplier relations for most organizations, you will find that most vendors will appreciate being evaluated on more than just price and will be motivated to work more closely with you.
With data analytics, context is king
One of the most exciting areas of procurement risk mitigation is exploring the use of new sources of data not previously leveraged by organizations to provide a richer context for greater levels of insight. By this, we mean unstructured sources such as reviews written by customers and employees of your suppliers, unfavourable mentions on social media, Google Alerts tracking supplier specific news and other important early warning signals that you should factor in, and monitor, when assessing how well your suppliers are performing now and predicting future performance.
This ‘big data’ approach to analytics will provide a more accurate and timely view on the financial strength of your suppliers than using traditional sources of information which fail to keep pace with an increasingly volatile market where even established players are vulnerable.
Of course, how companies address procurement risks will vary depending on current capabilities which are defined by existing investments in technology, people and processes. Without a doubt, we are witnessing a paradigm shift in the attitudes and behaviours of procurement professionals. As procurement teams become increasingly knowledgeable and comfortable with technology, the potential of data to help make decisions that were not possible a few years ago can now be realized.
The future of risk mitigation
Today, a number of procurement organizations are leading in creating a smarter, more effective way of mitigating supply chain risks by converging additional sources of data with existing technology solutions. By creating a single view of their suppliers while providing their suppliers with a unified customer experience, they are ensuring improved rates of engagement and performance for both parties. In these organizations, risk mitigation is embedded into everyday procurement processes and helping teams to make the right sourcing decisions, with confidence.
However, for the vast majority of procurement professionals and their organizations, risk mitigation remains a standalone capability, leaving the business open to disruption and financial burden. If you’re in the process of evolving your risk mitigation capabilities, don’t hesitate to reach out to the Rosslyn team for advice.