Supplier financial distress warnings have jumped 119% this year as regional lockdowns, plant closures and employee quarantines caused by the coronavirus pandemic have frozen cash flow and revenue for thousands of companies.
More than half of virus-related alerts for businesses point to a weakening financial situation in their supply chains, according to data from artificial intelligence software company riskmethods, and procurement and purchasing managers are still bracing for the worst.
Here are two warning signs of financial distress, and how to mitigate the threat.
In business and law, force majeure refers to an unforeseen event beyond anyone’s control that prevents parties from fulfilling a contract. Early this year, riskmethods reported a 123% monthly growth rate in force majeure events. In March, this shot up to 200%.
When one party in a contract declares force majeure, the other is exposed to certain financial threats. Within your supplier contract, for example, the force majeure clause limits their liability and may allow your supplier to “escape” from formerly binding agreements.
A special category of force majeure covers natural disasters, such as earthquakes, hurricanes, lightning strikes. These fall under force majeure events that strike without human influence. Whether the COVID-19 pandemic and its downstream consequences qualify for force majeure may depend on the law system in your country or state, or on the wording in your contract.
What you can do: Thoroughly review your agreement to determine whether it includes a force majeure provision and what it includes. Seek legal guidance to find out the exact definition of force majeure in your contract, along with any other natural disaster clause. More generally, if you suspect that your supplier is struggling financially as a result of COVID-19, raise the question early within your company. This opens the discussion, which as soon as possible should include your supplier.
Changes in Labor
Changes in labor, especially layoffs, are common financial distress signals. In the United States, the COVID-19 outbreak has resulted in widespread dismissals. Some 26 million Americans became unemployed within just four weeks from mid-March to mid-April.
Companies may apply for government assistance in the form of subsidized wages, allowing them to keep staff employed at reduced working hours. These “short-time work” arrangements — particularly common in Europe during an economic downturn — have increased 1,040% this year, riskmethods says.
What you can do: First, how do you find out that your supplier in another world region is sending staff home temporarily, or reducing payrolls? Reducing staff likely to represent a longer-term risk factor. So, when you learn of labor changes with your suppliers, initiate the conversation. Find out whether this has an impact to the delivery of materials and goods and whether they have plans to reinstate staff.
In either case, at first sign of financial distress, communicate openly with your suppliers. They may hesitate to contact you with bad news. And once you have opened the door, keep asking. Some companies may survive short-term but become destabilized as a result of structural damage and/or demand changes. Staying informed of your suppliers’ financial situation — and finding out their strategies for maintaining business continuity — are essential.
Using supply-chain risk management technology that informs you with up-to-date information about financial instability in your network can help you stay ahead of any situation as it evolves. The economic effects of the pandemic are far from over.
To remain competitive, enterprises need to develop strategies that enable them to recover and strengthen their businesses resilience.
Read more about riskmethods’ Coronavirus Supply Chain Visibility Kit, which uses AI to send risk alerts and can be activated within 48 hours.
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