Has your company experienced a “significant” supply chain risk event in the past 18 months, which negatively affected revenue, reputation and production time? If so, was it related to financial health of a supplier?
I ask because I’m intrigued by a new report from ProcureCon Indirect East and RapidRatings which discusses how procurement professionals can use key metrics to prevent supply chain disruptions. The report, “The State of Risk: Understanding Threats to Business Continuity, Supply Chain Challenges, and How Procurement can use Financial Health to Build Resilient Supply Chains,” is based on the responses of 88 procurement executives who were surveyed during the 2017 ProcureCon Indirect East conference.
Chief among the results of the survey are that more than a third of the respondents said their company has experienced a “significant” supply chain disruption in the past 18 months, which negatively affected revenue, reputation and production time. I was surprised by two other findings, the first being that the majority of survey respondents said their organization doesn’t actively track the financial health of suppliers after onboarding, even though financial issues are the most commonly cited cause of supplier disruptions. Secondly, only 14 percent of the respondents reported their company has a supply chain resilience strategy in place.
When survey respondents who did encounter supply chain disruptions over the last 24 months were asked to specify their causes, financial problems at a supplier were involved in 42 percent of the cases. Indeed, the most commonly reported cause of supply chain disruption was a financial issue on the part of a key supplier, resulting in losses of both production time and revenue, the report points out. “It’s easy to write that off as just another metric, but financial health is a factor that touches across many facets of an organization’s performance … [and it can] signal a host of other challenges in advance of their most disruptive consequences,” the authors continue.
“The survey picks up on the impact of supplier financial issues as the major category of disruption,” says Peter Murray, Managing Director, Supply Chain Risk and Resilience at RapidRatings. “Financial health is the root cause of so many supplier-caused disruptions, no matter what the immediate issue seems to be. In our research, we see supplier performance issues with quality and delivery being preceded by declines in financial health months and even years in advance.”
I was interested to read that adoption rates for elements of a risk management strategy, such as centers of excellence and supplier portals, remain at below 50 percent. That said, 41 percent of the executives reported their firm uses supplier portals. Procurement centers of excellence (CoE), which Spend Matters Chief Research Officer Pierre Mitchell describes as an “internal entity that performs knowledge-based services on a one-to-many basis to procurement (and to broader stakeholders) to drive scale, repeatability and best practice”—were listed secondly in survey responses, with a 38 percent adoption rate among the respondents’ firms.
As has been previously noted, key steps in working to assess and continuously monitor suppliers’ likelihood of financial failure obviously begins with identifying critical suppliers and their supply chains, and then conducting a review of financial indicators, including current and historical financial data. However, it’s critical from there to further consider qualitative factors, such as analyzing governance issues, leadership changes, litigations and investigations. Nonetheless, that’s really just a start.
What key steps do you think are necessary to further, and continuously, monitor suppliers’ financial health? Secondly, do you agree suppliers’ financial health is a growing cause of supply chain disruptions?