Supplier risk has emerged as a
key focus area for some of the businesses like personal Computers, automobiles,
retail, etc in the past year due to the natural disasters like Japan earthquake,
subsequent tsunami and Thailand Flooding that not only shut down the
manufacturing facilities but also had affect on the components supplies to the
manufacturers. Another concern is the on going Euro Zone Sovereign Debt crisis
that is having affect on the global economy as the effects are being felt in
low cost production countries like India and China where economic indicators
like rising wages and commodity inflations, falling production numbers and
governments expecting lower economic growth when compared to previous years.
Most of the countries are seeing their respective currencies depreciate versus
US dollar and Japan Yen and despite US and Japan economies struggling to keep
up their economic growth rates, but dollar and Yen are appreciating as
investors perceive them to be safe bets. Natural Disasters, Macroeconomic
uncertainty, currency volatility, inflation, etc have made businesses focus on
the supplier risk even more this year. Procurement Outsourcing Service
Providers have been working with their clients on the Supplier Risk Management
by monitoring the supplier financials and qualitative risks for the larger
vendors but the smaller privately held vendors are difficult to monitor. PO BPO
vendors have an excellent opportunity in Supplier Risk management and vendors have
an opportunity to earn more billing compared to transactional work.
Financial
Metrics
Supplier profiles are part of
initial process of identifying the suppliers and complete profile of each
supplier is made which has all the financial, operational, legal, management
& leadership, compliance, etc information and based on this information
buyers select their suppliers. These profiles have to be updated quarterly as
and when the suppliers declare their financials and the quarterly financials
have to be analyzed and look out for any specific information that may have a
drastic effect of the supplier performance. There is lot of financial
information available on the internet and third party sources and it may be
difficult for the procurement executives and leadership to comprehend all of
it. Hence a report template has to be developed which will have the necessary
relevant information that is critical with analysis to understand the supplier
financial capability. Information related to liquidity, profitability,
solvency, days sales outstanding, capital, cash flows and other operating
metrics are must to know for the procurement organization. Various financial
metrics have to be analyzed and compared with the relevant information and
reported to the procurement and other stakeholders. Financial metrics will not
only provide information about the financial capabilities but also helps buyers
in negotiating discounts or seeking financial support or involving them in the
innovation and product development process.
The objective of Supplier Profile
with financial metrics is to provide the procurement, finance departments and
other stakeholders within the organization the relevant updated information so
that they can assess the inherent risk involved in dealing with the particular
supplier, financial stability and capability of the supplier, whether supplier
can collaborate with buyer in the innovation process, how well the supplier is
equipped to face the uncertainties and what will be the effect of the supplier
failure on the buyers business. Along with financial information the profile
should also provide other information like whether the supplier is a target of
acquisition, involved in litigations, etc and the subsequent effects of these
on the suppliers and buyers business. Supplier profiles should be easy to
understand and accessible to the procurement department and other stakeholders
in the organization so that they can be used in the decision making process. These
profiles are critical in times of crisis and economic uncertainty like the
present business environment and help the businesses to make decisions and
develop the necessary counter strategies.
Collaboration between the buyers
and suppliers have become critical for the success of innovative organizations
that are constantly involved in developing new products as suppliers also play
a key role in the manufacturing the product. Suppliers should be in a position
to revamp their production capabilities, source the raw materials at reasonable
costs, maintain the production facilities & quality standards, invest in
people and technologies, etc and they need finance to do this. Suppliers too
have to invest and foresee the technological shifts and innovations that are
happening in the industry and should look to equip themselves accordingly.
Supplier’s failure has direct impact on the buyers businesses in terms of
revenues, profitability, reputation and buyers have to keep track on all the
major and critical suppliers. Based on the impact of the shortage of particular
supply on the business, buyers have to prioritize which suppliers to keep track
of. Suppliers should be financially sound to not only run the existing
operations but also be able to comply with the buyer’s policies and
regulations. Suppliers on the verge of bankruptcy and M&A target have to be
identified and the procurement and other stakeholders have to be intimated
immediately and analyzed to understand the repercussions and formulate the
strategy. Financially stable suppliers are must for the businesses to survive
and offer innovative products and services to their consumers.
Natural Disasters like the Japan
Earthquake subsequent Tsunami and Thailand Flooding has severe affect of the
suppliers. Suppliers had to shut down the manufacturing for significant periods
of time leading to supply shortages, loss of revenues leading to loss of
profitability and rising costs in terms of cleanups, repairs and maintenances.
Natural disasters lead to huge financial strains on the businesses and it will
take time for the affected businesses to recover and buyers will be forced to
announce shortages and subsequent loss of revenues and profitability. Buyers
have to assess the financial and other implications as soon as possible and
formulate the alternate strategies. Macroeconomic uncertainties like the Euro
Zone Debt crisis, countries failure to repay debts, widening budget deficits,
rising inflation of commodities, raw materials and wages, unemployment levels
and subsequent fall in production and growth rates have significant affect on
both the suppliers and buyers. Buyers have to keep a close eye on the country’s
macroeconomic indicators where the Supplier’s manufacturing is located and make
sure there won’t be any surprises. The economic data is available and it has to
be analyzed and the necessary reports have to be provided to all stakeholders.
Poor & uncertain macroeconomic situation often lead to civil unrest, rising
input prices & shortages, etc which will affect the supplier’s.
Qualitative Information
Apart from Supplier Financials
other factors that impact supplier performance are the leadership and
management issues like change in the CEO, departure of key management &
operational people, Labor problems like strikes, unrest among the workers,
legal & regulatory problems like environmental compliance issues,
intellectual property rights issues, litigations and legal disputes, failure to
comply with agreed standards, subsequent closure of the production facilities,
accidents like fire, breakdowns, etc, fines and penalties imposed by regulatory
authorities also have effect on the Supplier performance and finances. A close
watch have to be kept on the suppliers, all the rumors, news and alerts have to
be verified, failures, accidents, issues have to be documented and information
have to be provided to the procurement teams and other stakeholders
immediately. All these issues will not only affect the supplier capability both
operational and financial but also affect the buyers as some times buyers are
also dragged into these disputes and are forced to pay penalties which have an
affect on the finances and brand reputation. Supplier’s failure to comply with
specified standards set both by the buyers and regulatory agencies have serious
direct implications on the buyers business and reputations. Procurement executives
have to do regular audits and check for the compliances and present their
reports to the management.
Developing and maintaining
Supplier profiles is one of the processes that can be outsourced to procurement
outsourcing service providers. Procurement BPO vendors can recruit people who
are trained in financial research, experienced with using the secondary data
sources and company investor relations and SEC or other regulatory sites and
utilize them in maintaining Supplier profiles. A Supplier Profile should have
brief history of the supplier, Historical and current financial data related to
revenues, costs, operating margins, Buyer spend with Supplier, type of spend
and products and services, M&A, Tools & Technologies used, contact
details, etc. Liquidity, Solvency, Profitability, Capital Ratios, Accounts
Payables/Receivables, Day Sales/payables Outstanding, etc are some of the
common financial metrics in the supplier profiles. Most of the financial metrics
data is easily available on many financial websites for free and both vendors
and clients have to agree on the data sources from where the data will be
taken.
Apart from the financial metrics
Supplier performance metrics or balance score cards related to the supply of
the product/service to the buyer which highlight whether they meet the agreed
standards and comply with the policies. The profile should also highlight the
recent transactions the supplier has done and also the news related to supplier
should also be there. Based on the client’s requirements Vendors have to
develop the report template and after agreeing on the template, profiling of
the major critical suppliers have to be started first. Small & medium
suppliers profiling has to be done based on the criticality of the supplier in
relation to the core product offering or smooth running of the businesses. The
profiles have to be updated as and when the financials are announced by the
Suppliers and specific information if any has to be reported immediately. Small
privately held suppliers data is a challenge and often difficult to get and the
best option will be the buyers asking the suppliers to provide the financial
data. Supplier Profiles are very important for buyers in the present scenario
and Procurement BPO vendors can play active role in providing the necessary
information to the buyers.