Supplier Risk Management 2012 – Supplier Profiles - Increased focus on Supplier Financials & Qualitative Information – Procurement BPO Vendors

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.   

Opportunity for Procurement BPO Vendors

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.