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After a continuous decline over the last two years, supplier risk in the retail industry is showing signs of improvement, according to findings released today by CVM Solutions, a provider of enterprise supplier management solutions and owner of the CVM Master Supplier Database.
While supplier risk is lessening overall, however, specific supplier sub-sectors - such as business services, electronics and industrial products - still are experiencing financial difficulties that may present risk for their retail customers, the findings show.
"While retail supplier health has not returned to pre-recession levels, the upswing in financial stability of key suppliers during the first two quarters of 2009 is a positive sign for the retail community," says Jon Bovit, vice president of marketing and strategy for CVM Solutions. "Of the eight supplier sub-sectors we analyzed, electronics appeared to be still suffering from the stagnating economy, likely due to over capacity and sharp price reductions on big-ticket items."
To determine retailers' supplier risk, CVM utilized a sample data set from its CVM Master Supplier Database that included many of the top retailers in North America. CVM then selected key publicly traded suppliers to these retail customers and calculated an Altman Z-Score for each customer and supplier to objectively measure risk. The Altman Z-Score is a financial analysis model that examines five company financial ratios and is highly predictive of a company's bankruptcy risk. An Altman Z-Score of less than 2.6 is considered "high risk."
CVM then segmented the suppliers into eight sub-sectors - apparel, building products, business services, electronics, food/retail drug, home furnishings/appliance, industrial products and non-food retail - to evaluate risk by category.
The resulting analysis showed that the retailers' stability had started improving back in the beginning of this year and that direct suppliers to the retail industry seems to be trailing the retailer recovery by at least a quarter. The resulting analysis showed that the suppliers average Altman Z-Score has bottomed out in the last two quarters and has remained at 3.46.
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