Moving Beyond Supplier Financial Risk
Financial risk has been repetitively brought to the forefront as the key source of risk in a supplier-buyer relation. Supplier bankruptcy is most feared among buyers, especially those who do not have dual sourcing strategies as well as no insight into their supplier’s growth and history. Although financial insight can be acquired by looking into a supplier’s financial history and projected growth numbers, a variety of factors that result in supply chain disruptions are not looked at closely.
Unplanned IT or telecommunications outage, transport network disruptions, data breach, act of terrorism, new laws & regulations, insolvency in the supply chain are some of the causes of a disruption in the supply chain. The impact from these causes can be high, medium or low in different scenarios.
Traditional approaches to gather supplier risk data has been to rely on a credit rating provider and of course, the widely used way of checking supplier’s financial documents. Many a time, even though there are clauses in the contracts that force a supplier to pay compensation to the buying side in case of compliance failures, the supplier may not be in a state to pay up immediately. As a result, the buying team has to start looking for alternate suppliers and also take actions to minimize the damage done.
In order to go beyond financial risk associated with suppliers, organizations could use multiple information sources covering a variety of risk topics. Broadening the sources to include market and cost changes, regulatory and legal risks, or a supplier’s quality and performance provides a better indication of a supplier’s health. All of this information needs to be updated over time, through accurate sources in order to monitor and take necessary steps towards preventing a supply chain disruption. It is past time, to look beyond financial information of suppliers and do a thorough health check of your suppliers.
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