Executive Briefings

Protecting Your Supply Chain Against Financial Vulnerability

The global credit crunch is jeopardizing the financial health of our supply chains. In 2009, companies should reassess suppliers' financial stability and implement processes to spot operational red flags that are early warning signals of financial stress.

Economic uncertainty and supplier vulnerabilities and disruptions top the list of corporate concerns, according to interviews with dozens of North American companies in late 2008.

Is the global economic crisis creating hidden cracks in your supply chain? The worldwide credit crunch, slowed economies, and changed consumer preferences triggered in 2008 will continue to reverberate in 2009. Companies need to be at the top of their risk management game to prevent fissures in their supply chain from creating financial and market share damage. Benchmark research by Marsh Inc. finds that leading companies are changing their supply chain risk practices for 2009 to better protect themselves and their customers.

• How has your line of credit with your bank changed from the beginning of 2008?
• Have your key suppliers or customers changed their payment terms? If so, how are you compensating?
• Do you have sufficient cash flow to fund fully the raw material purchases for our orders?

In 2009, companies need to reassess their supplier management programs, including reevaluating their payment and INCO terms. Overly aggressive accounts payable programs and lingering invoice disputes can damage the operational reliability of your suppliers. Companies that have been demanding longer payment terms across the board with their suppliers should consider slowing down those initiatives for their more financially vulnerable suppliers and even increasing raw material purchases for suppliers in some instances.

Continuous monitoring of supplier performance is crucial to spotting financial "red flags." In particular, greater lead-time volatility, more short shipments, and increased quality hiccups can signal financial difficulties and should trigger a thorough reexamination of the supplier. Also monitor whether your supplier has cut back on its quality assurance staff or switched its suppliers in an attempt to cut costs.

Global Sourcing Risks Rise

In addition, because financial analysis can be especially difficult in emerging markets, consider creating greater resiliency in your supply chain through reducing sole sourcing activity and increasing the diversity of countries in which you source. This can shield your company from socioeconomic instability, local financial institution failures, and so forth. Beware that the current stressed financial condition of many sectors means that any natural disaster, labor strike, or supply shortage may have a significantly more catastrophic effect. An emerging trend is for companies to request that their key suppliers show them their business continuity plans and explain how they plan to keep you supplied during a crisis.

Perhaps the single most common mistake companies make in evaluating supplier vulnerabilities is looking only at their direct supply base. Many companies' supply chains have been significantly harmed by disruptions among their tier 2 or tier 3 suppliers. Ensure that your supply chain staff is actively looking for hidden interdependencies and geographic concentration points in your end-to-end supply chain. For instance, are multiple of your tier 1 suppliers relying on the same tier 2 supplier for a key material or ingredient? Is upstream sourcing concentrated in a particular country or reliant on a single logistics node?

In addition to internal due diligence, also be aware that new supply chain insurance products introduced in 2008 can help protect your most valuable product lines against supply delays, supplier financial woes, and other disruptions, including delays caused by tier 2 and tier 3 suppliers. 

The Outlook

In 2009, leading companies will evolve their supplier management practices to include more frequent and deeper evaluations of supplier financial health. Using cross-functional teams, these companies will better align purchasing, finance, supply chain operations, and corporate risk practices to spot financial vulnerabilities and take actions to ensure the continued viability of their supply base.

Economic uncertainty and supplier vulnerabilities and disruptions top the list of corporate concerns, according to interviews with dozens of North American companies in late 2008.

Is the global economic crisis creating hidden cracks in your supply chain? The worldwide credit crunch, slowed economies, and changed consumer preferences triggered in 2008 will continue to reverberate in 2009. Companies need to be at the top of their risk management game to prevent fissures in their supply chain from creating financial and market share damage. Benchmark research by Marsh Inc. finds that leading companies are changing their supply chain risk practices for 2009 to better protect themselves and their customers.

• How has your line of credit with your bank changed from the beginning of 2008?
• Have your key suppliers or customers changed their payment terms? If so, how are you compensating?
• Do you have sufficient cash flow to fund fully the raw material purchases for our orders?

In 2009, companies need to reassess their supplier management programs, including reevaluating their payment and INCO terms. Overly aggressive accounts payable programs and lingering invoice disputes can damage the operational reliability of your suppliers. Companies that have been demanding longer payment terms across the board with their suppliers should consider slowing down those initiatives for their more financially vulnerable suppliers and even increasing raw material purchases for suppliers in some instances.

Continuous monitoring of supplier performance is crucial to spotting financial "red flags." In particular, greater lead-time volatility, more short shipments, and increased quality hiccups can signal financial difficulties and should trigger a thorough reexamination of the supplier. Also monitor whether your supplier has cut back on its quality assurance staff or switched its suppliers in an attempt to cut costs.

Global Sourcing Risks Rise

In addition, because financial analysis can be especially difficult in emerging markets, consider creating greater resiliency in your supply chain through reducing sole sourcing activity and increasing the diversity of countries in which you source. This can shield your company from socioeconomic instability, local financial institution failures, and so forth. Beware that the current stressed financial condition of many sectors means that any natural disaster, labor strike, or supply shortage may have a significantly more catastrophic effect. An emerging trend is for companies to request that their key suppliers show them their business continuity plans and explain how they plan to keep you supplied during a crisis.

Perhaps the single most common mistake companies make in evaluating supplier vulnerabilities is looking only at their direct supply base. Many companies' supply chains have been significantly harmed by disruptions among their tier 2 or tier 3 suppliers. Ensure that your supply chain staff is actively looking for hidden interdependencies and geographic concentration points in your end-to-end supply chain. For instance, are multiple of your tier 1 suppliers relying on the same tier 2 supplier for a key material or ingredient? Is upstream sourcing concentrated in a particular country or reliant on a single logistics node?

In addition to internal due diligence, also be aware that new supply chain insurance products introduced in 2008 can help protect your most valuable product lines against supply delays, supplier financial woes, and other disruptions, including delays caused by tier 2 and tier 3 suppliers. 

The Outlook

In 2009, leading companies will evolve their supplier management practices to include more frequent and deeper evaluations of supplier financial health. Using cross-functional teams, these companies will better align purchasing, finance, supply chain operations, and corporate risk practices to spot financial vulnerabilities and take actions to ensure the continued viability of their supply base.