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    Know your supplier – know your risk exposure

    Your company’s performance depends on your key suppliers. If you understand their financial vulnerabilities, you can prepare for future problems

    The single biggest issue for supply chain managers is supplier performance,” says Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody’s Analytics. The best predictor of a supplier’s near- and medium-term performance is its financial situation. “If your supplier is becoming financially weak, performance issues and operational problems are likely to follow,” says Quinn-Barabanov.

    Greg Johnson, Industry Practice Lead at Moody’s Analytics, points out that only a small proportion of US companies issue publicly available financial statements. “Behavior data can fill these gaps,” he says, explaining that a company’s spending is the indicator to look for.

    All organizations have a hierarchy of suppliers. A financially stressed company will slow or cut non-essential spend first. When spend to essential suppliers slows, the company is likely to have critical financial problems.

    Understanding your suppliers’ ownership structures also improves your insight into your financial risk exposure. You may think you have diversified your suppliers, explains Vitaliano Tobruk, Supplier Risk Industry Practice Lead at Moody’s Analytics, but you may not realize if some suppliers are part of the same group – and therefore equally vulnerable.

    A 360-degree view of supplier risk

    It’s essential that supplier data is up to date, adds Johnson, because bad payments often take two to three months to show up in traditional credit scores. Tobruk says that automated monitoring can alert you early to potential problems. Alerts can be customized according to your risk appetite, and can cover risk factors beyond financial risk.

    Johnson stresses the importance of consistent data. “If you go to several companies for supplier data, you might have inconsistent data, leading to potential problems down the line.” Relying only on data from your suppliers can also be risky, because they may not provide everything you need. A third-party source can create a fuller picture, enabling you to make decisions with confidence.

    Your suppliers affect your financial and operational performance immensely, so analysis on them needs to be relevant, consistent, and accurate.

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