Supply Chain Risk Mitigation: Part II
May 15, 2013 - SCMR Editorial
Analysts advise shippers to take an inventory of existing and potential risks as a way to determine immediate threats and those that may be posed in the future by suppliers. But experts insist that there’s a “private company conundrum” that keeps shippers from conducting a thorough financial analysis.
“Logistics managers often don’t understand the information provided, and are afraid to ask for help,” says Kelly-Falls. “If the manager decides to rely on his finance team to examine the details, the contracting deal may fall through because time has run out.”
Moreover, says Kelly-Falls, some suppliers will stop supporting current products or service if financial due diligence is employed. She says that is not uncommon for suppliers to negotiate disclosure “out of the contract,” and offer a price incentive to avoid submission of the information.
“Managers often tell me that they would just prefer not to have this confrontation,” she says. “And if they do have the courage to start one, they may not follow through if the supplier begins to stall.”
Rapid Ratings International is trying to address these concerns by providing managers with a financial analytics “checklist,” containing the following questions:
*How many of your suppliers are private? Has this even been reviewed?
*How many have had financials assessments completed in the last
year? Last three years, or even the last 5 years?
*If there a systematic process for financial analysis or it is triage?
*If your procedures require you to conduct financial assessments?
*What method is used in order to measure financial risk?
*How many suppliers are in the US? How many are international ?
*The revenue impact that critical components have on the business?
*If other operational issues (warning signs) trigger a financial review?
*If you analyze tier I, II and III suppliers? Do you know who their tier II
and tier III suppliers are?
By taking these steps, says Kelly-Falls, shippers can create an opportunity to build a strategic and collaborative relationship. She cautions, however, against using the information as a “cost reduction” initiative.
“You should share the analyis with the supplier so they are aware of the results,” she adds. “This allows for an open dialogue, demonstrates that that you respect supplier’s request for limited access to the data.”
But if the supplier still says “no,” it may be time to go to a third-party for a final evaluation of the relationship. Suppliers with inconsistent financial issues, says Kelly-Jones, tend to become unreliable and
eventually will be your “full time job.”
“Financial health isn’t just about default/failure, its also about having the
ability to make better business decisions,” she adds.
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