Are Any of Your Suppliers at Risk of Failure?

06 Jul 2018
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To date, a lot of procurement’s risk focus has been “on the front end”. In doing their bit for financial sustainability, procurement professionals often focus their efforts on buying at the best price from reliable suppliers. But a singular focus on easily-measured economic aspects such as price fails to address end-to-end risks and procurement’s obligation to ensure ongoing successful service delivery across all operations.

Supplier Acquisition

The first step in addressing procurement risk is to be able to cost-effectively cast the net wide enough to identify potential suppliers. Current technology such as e-Procurement allows organisations to search far and wide for potential suppliers. So far, so good…

But then we’re faced with offers from organisations we don’t know. However, the uneasy reality is that we may not even really “know” our existing suppliers.

In a competitive business environment where business failure is unfortunately not uncommon, there’s an increasing need to fully understand the risks associated with all suppliers – including those we think we know well. We’ve all seen “successful” businesses fail, and the collapse of any supplier can be disruptive to an organisation. Loss of a key vendor can be devastating, costly and damaging to your reputation.

So, it’s becoming increasingly common practice to include financial viability or, conversely, business failure risk reporting, into the tender process itself.

To do so requires reliable information. For low-value, commodity-type supplies, it may suffice to gather that information through a few key questions in the tender document and/or a search of some of the public insolvency databases. But as the value and importance of the purchase increases, so, too, does the need for independent and reliable insights into supplier solvency and viability. This is even more crucial where there are only one or two providers who can supply vital goods or services. 

Ongoing Diligence

Unfortunately, financial risk identification is not a “set and forget” activity. Business conditions change, and suppliers need to be monitored on an ongoing basis to ensure that they can still be depended upon. A simple scan of the insolvency listings to make sure your suppliers are not included is not enough.

You need reliable, detailed analysis. At an aggregated level, you can access supplier portfolio monitoring services which provide insights into the collective financial health of your whole supplier base. At an individual supplier level, company-specific monitoring services can provide early warnings of financial stress. In some cases, these warnings have been flagged up to four months before formal bankruptcy proceedings. Being first to know gives you more time to manage the damage.

So, if the contract is important, you need to keep an ongoing watch over your suppliers - something many businesses overlook. 

Of course, there’s a cost to any due diligence process. The challenge is balancing risk with the additional investment required to ensure financial sustainability. Luckily, in some cases, the financial burden can be passed on to - or shared with - suppliers. If the prize is big enough, it’s not unreasonable to expect bidders to supply (or fund) independent third-party business risk reports. These can be required as part of their initial tender submission, or at the later shortlisting stage.

If your organisation is focused on ongoing financial sustainability, it needs a strategic procurement focus. That’s not just about getting the right deals, it’s more about the establishment and ongoing management of a reliable supply chain. In volatile business conditions, organisations need due diligence and reliable information – during the tender process, when contracting suppliers, and on an ongoing basis. All vendors need to be monitored, especially those supplying high-value goods and services. And the monitoring shouldn’t just be for their value and compliance, but also for their viability, because your survival can depend on theirs.

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