When managing a supplier portfolio, a crucial prerequisite for success is the financial health of your suppliers. The declining financial performance of a key supplier often causes vast and severe ramifications: it negatively impacts their ability to secure the needed raw materials and component parts to support your demand requirements. It even impacts subtler areas including investment in people, processes, technology and innovation – all of which have a profound impact on their operations.
In short, a supplier's poor financial health directly impacts your business. So, what can Supply Chain teams do to protect their business from financial and reputation harm?
Gaining visibility of financial performance
Often Supply Chain teams and suppliers have the right intentions to measure performance. They set performance expectations and requirements, as well as rigorous monitoring process to ensure compliance, which are usually established at the beginning of the relationship. However, most (if not all) of the monitoring scorecards that focus on backward-looking or operational-focused metrics, such as the perfect order measurement (on time, in full, acceptable quality and ASN accuracy).
The issue with using these retrospective datapoints is that, by the time such metrics fall below the established targets, the negative impacts to your company’s revenue and profitability have already been realized.
Therefore, the key is to have visibility over the early warning signs. A proactive way to mitigate such risks is to gain visibility over forward-looking or leading indicators, or predictive analytics that can find future supplier performance shortfalls. With this in mind, gaining insights to your supplier’s financial health is one of the strongest leading indicators or predictions for assessing their ongoing ability to support your business requirements.
The information challenge for Supply Chain teams
This can be easier said than done, however. Typically, publicly-available financial statements on public companies are focused on lagging indicators such as income statements, balance sheets, cash flow statements and financial ratios.
Sure, they can provide some insight to future risk. But significant analysis must be completed to glean the needed insights. What’s more, the quarterly publishing cycle alone is yet another barrier for prompt and proactive responses to identified risks. For private companies, the challenge is even greater with limited or no access to financial statements.
In a world of fast paced advancements with artificial intelligence (AI), machine learning (ML) and predictive analytics, creating financially-based, forward-looking, predictive supplier performance risk scores for both public and private company suppliers is an important step towards identifying and mitigating risks in your supply chain.
This approach unlocks the ability to provide early identification of supplier performance risks – such as incomplete and late deliveries, quality issues with products and services, and cost increases, while providing the time for collaboration with critical suppliers on risk mitigation actions.
Learn how Moody’s is supporting customers to identify and mitigate their supply chain risks, thanks to its range of rigorous data and advanced analytics.