Ensure Business Continuity: Assess Your Supplier’s Financial Health

The foundation of a company is, almost by definition, the strength and reliability of its suppliers. Otherwise, how could it turn out products in a timely and profitable way?

Unless you take the time to fully vet each key supplier, you’re likely to be putting your company at considerable risk. In fact, verifying your suppliers’ financial security might just be the most important task you’ll carry out as the new business year begins. 

Supplier relationships are symbiotic, and there’s risk for both participants. Suppliers need to know they’re a valued and secure member of your supply chain, and you need to know that you’ll receive what you need, when you need it.

Industrially driven companies require stable suppliers to keep up with demand and meet their own growth goals. Imagine the failure to deliver one critical item, then multiply that delay by the total number of suppliers and projects. You can easily understand the potential impact of just one supplier’s failure, and the importance of assessing financial stability. 

Relying on one supplier for a key service or part without proper vetting is the very definition of risk creation. There are literally hundreds of potential occurrences and forces that are completely outside the control of your suppliers, including global weather patterns, shipping delays, and loss of manpower. Thirty-one percent of respondents to a recent MIT/PwC study said “supply-chain operations are most sensitive to skill set and expertise,” while more than 60% see drops in financial performance as the result of disruptions within their supply chains.

When organizations take the time to carefully vet their suppliers, including tasks such as gathering and monitoring financial information on key suppliers and maintaining a close eye on this information, it’s possible to mitigate or even remove the risk created by the very nature of business-supplier relationships. As you consider how to properly manage the risk within your group of suppliers, it should become abundantly clear how this process and ongoing commitment can help drive business success.

While it’s easy to talk about mitigating risk, what’s even more important is understanding the details on how to protect your business. Consider these steps as a guideline: 

• Assess risk, then do the appropriate research. Different organizations have varying levels of risk comfort depending on the importance of the supplier to the business’s success. Carefully determine where the greatest risk lies for your business. Then rank your suppliers in order of importance.
• Gather the right data. Once you know where your business is most vulnerable, begin gathering data to determine the supplier’s financial health. Places to start in the information-gathering process include annual revenue, D&B scores, third-party financial ratings, legal searches (judgments or liens), debarment searches, business-continuity plans, financial references, and merger and acquisition activity.
• Research and consider third-party “tracking” solutions. Not every business has the internal resources necessary to handle several supplier assessments. There are organizations with which companies can partner to gather, validate and track over time all required supplier information, along with compliance data (where required) and other prequalification needs. Don’t be satisfied with spreadsheets and file cabinets full of paper-based information.

Make the commitment to protect your business by finding, vetting and building relationships with the most reliable and financially secure partners, to minimize the risk and threats that might otherwise be introduced to your company. It’s definitely worth the time to determine the path to protecting your business, customers and employees.

Richard Parke is senior vice president of supplier services at Avetta.