Raw materials suppliers have different balance sheets to labour-intensive providers © Getty Images
Raw materials suppliers have different balance sheets to labour-intensive providers © Getty Images

What CPOs need to know about supplier financial health

26 August 2020

Monitoring suppliers’ financial health is pivotal for proactive risk management, but many organisations struggle to do it effectively, according to research.

The research from Gartner found many firms lack solid data and processes for monitoring supplier financial health, which in turn could cause “irreparable damage to the supply chain”.

“Financial risk identifies the financial viability of a supplier, and whether the supplier is currently experiencing, or likely to experience, any financial issues that will impair its ability to fulfil obligations toward your organisation,” Gartner explained.

Market dynamics, economic climate, competition, and the supplier’s operational and business models can all impact the financial health of suppliers.

The report said having a standardised process in place would allow non financial staff to extract key indicators from financial reports, enabling baselining of results over time and fair comparison between suppliers.

This would not only drive transparency, but would also “enable the procurement function to apply mitigations faster and with more impact”.

The report said: “While this approach will highlight strength in the supply chain driven by financially viable suppliers, it will also enable supply chain leaders to drive attention to vulnerabilities caused by financial weaknesses.

“Mitigations will be even more impactful with complementary qualitative checks in addition to the financial health evaluation. Depending on the spend complexity and the supplier relationship, the history of using the products or services, the criticality of the component(s) and other considerations, the depth of qualitative research required will vary and may need significant vetting into different areas, such as relationship strength, dependencies and other factors.”

CPOs must also consider variability in suppliers driven by different mixtures of products and services.

“Raw material-intensive suppliers may differ from labour-intensive providers with regards to inventory levels … Multi-location global facilities-based suppliers have notably different balance sheets than regionally-focused suppliers, and procurement leaders should expect that ratings will be accompanied by additional qualitative comments that are unique to that industry, market and supplier,” Gartner said. 

CPOs may find manually monitoring suppliers’ financial health to be the fastest way initially, but as complexity increases, technology will be crucial for process sustainability, effectiveness and efficiency, Gartner said. 

“Now is the time to invest into technology. Many others are investing in digitisation overall and will, therefore, advance and maybe even leap ahead. If your organisation doesn’t plan for investments in the near future the impact will be that it will fall behind in resilience, competitiveness and innovation.”

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