Why is Monitoring Supplier Financial Health Important?

Question: Why is Monitoring Supplier Financial Health Important?

Supplier financial health impacts several critical areas: supplier performance and quality, continuity and logistics, and capability for growth and innovation. When your supplier’s financial health fails, it exposes your organization’s supply chain.

Answer:

Supplier financial health should be continuously monitored given supplier bankruptcy can disrupt your organization’s operations. Secondarily, financially distressed suppliers impact your processes prior to bankruptcy¹ due to:

• Poorer-quality products and services,
• Reduced maintenance and R&D investments, 
• Being prone to their own disruptions

Conversely, financially durable suppliers have the resources available to improve operations, quality control, and innovation – factors that uphold supplier continuity, standards, and growth. Supply chain finance has a strong relationship with supplier stability, according to peer-reviewed sources², explaining why leading organizations continue to expand into these financing arrangements. Healthy suppliers also withstand economic and industry downturns more effectively, which allows them to better meet performance requirements. 

Figure 1: Supplier financial risk assessment is a critical first step to know if a supplier will stay in business; other risk categories should be reviewed after. 

For example, if a supplier has a high risk of failure in the next 12 months, organizations will implement risk management tactics to avoid disruption, including sourcing supply alternatives.

Whether your procurement spend is large or small with a supplier, both can have outsized impacts on your organization. According to an MIT study³: “small and specialized suppliers with low procurement spending that they had assessed as low-risk-impact turned out to affect 34% to 86% of the total revenue.” In turn, supply chain leaders should track procurement spend, but also strategically prioritize the supplier financial risk assessment (i.e., high, medium, low risk). 

Supplier financial health must be continuously monitored with reliable financial risk analytics and data. Not all financial risk models perform well, as different model types (e.g., payment, financial, firmographic, default, or LLM) can fail to warn about supplier financial distress and bankruptcy, especially in volatile economic environments. If one of your suppliers were to declare bankruptcy tomorrow, how would your operations be affected? Could it shut down your processes, impact customer commitments, or require significant time to recover?

The best strategic approach is partnering with financially durable suppliers that will help safeguard your organization against disruptive threats.

Key Takeaways

Supplier financial risk impacts all organizations, whether you are sourcing from a few dozen to tens of thousands of vendors. Organizations are improving their supply chain resiliency with the following actions:

• Continuously monitor supplier financial health: Early warning signs of financial stress and bankruptcy help to warn about supplier performance issues, enabling preventative risk measures.
• Evaluate large and small suppliers: Even low-spend vendors have substantial influence on business performance; procurement leaders should focus on the supplier financial risk assessment (low, medium, high) and understand the potential impact.
• Integrate high-quality financial analytics: Reliable models and data should be used to accurately identify supplier financial risk and bankruptcy; procurement teams include these information sources for enriched supply chain reporting and better workflows.

Click below to learn more about supplier financial risk.

Sources:

¹CreditRiskMonitor: Supply Chain Solutions
²The Impact of Supply Chain Finance on Supplier Stability: The Mediation Role of Corporate Risk-Taking
³Calculating Financial Business Risk to Identify Supply Chain Vulnerabilities