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    The Early Warning Signals in Supply Chains

    November 2022

    The Early Warning Signals in Supply Chains

    Your supply chain can provide early warnings of your suppliers’ financial viability, as well as showing the other risks your partners could expose you to.

    Your suppliers can be the source of many types of risk. Performance risk is perhaps the most important – if your supplier can no longer meet its obligations, your operations suffer. But how can you assess your suppliers’ performance in a timely manner when data is often lacking?

    One way is to look at the wider supply chain – in other words, your suppliers’ suppliers. Supply chain spend and payment behavior data can be an indicator of risk, by showing you what your suppliers are doing.

    Consider spending behavior. Every business has a hierarchy of suppliers, and a company in distress will reduce or eliminate spend with their least critical suppliers. Reduced spend and slow payments to the least critical suppliers are your earliest warning signals. If the stress worsens, the company might reduce spend and slow payments with the more critical suppliers in the hierarchy. When you see this happening, that’s a sure sign of problems.

    Behavior data provides an early warning of financial distress and this gives you information to assess the risk. But for such warning signals to be effective, the data needs to be fresh. Traditional credit scores might lag bad payments by two or three months.

    A 360-degree view of risk

    The financial viability of your suppliers is a high priority. But your procurement team evaluates potential suppliers on other risks too. You therefore need an integrated risk assessment to get the most comprehensive information on any company you might want to do business with.

    The risks that your suppliers could expose you to include reputational risk, compliance risk, and cyber risk. So while financial performance is important, you must assess your total exposure to a company. To do so, you need information about extreme weather planning, cybersecurity, ownership structures, and much else besides.

    Find out how we can help you get the right data at the right time so that you can mitigate your supplier risk.