Checking Suppliers Through Supplier Financial Viability Assessments
Suppliers do go out of business, whether due to the economic environment, poor financial practices (cash flow management and inventory turnover), or any other variety of factors. When this happens, this can cause dramatic implications downstream. Especially if the company is your primary supplier and critical to your production/fulfillment plans.
If this has happened to you, you may now have Internal Audit getting involved and trying to understand what exactly went wrong. More than likely this will boil down to your organization needing to track the financial health of your suppliers, in which now procurement is tasked with implementing a supplier financial viability toolset. To do this, you will need to establish the sourcing criteria for financial health providers and create your internal process on managing financial health..
Sourcing Criteria for Provider
Establishing the sourcing criteria for each provider will be key in determining supplier financial viability. The criteria will be different among both private and public companies and include the following:
Private companies - Private company data is by far the most challenging to acquire as they don’t have to report financials to the public. Avoid updating data through internet searches or searching for public data, as this will result in poor data quality. Your organization will need to speak directly to the supplier and their finance team and obtain the necessary information needed to determine the financial health score (FHS). This may be the first time the supplier has had to do this, but if they have done it in the past then see if they already have information prepared to minimize additional cost/effort.
Public companies - Obtaining financial information from public companies is much easier/simpler than from a private company. You can locate their finances with a simple internet search and obtain updates on their quarterly financial status. It may still be beneficial to reach out to the company and ask them for further insight if there are any gaps between the information provided online and what you need. Ensure that FHS scores are updated on a quarterly basis, as most providers only update yearly. As we know, financial situations can change drastically in a year’s time.
Data quality is the most important point to emphasize here, which is why it is critical to ensure accurate and up-to-date information. Now we have established your sourcing criteria, let's dive into the creation of our internal process.
Creating Your Internal Process
This process will be critical to the future success of your organization and help with avoiding supply disruptions down the road. Building this process requires a few key metrics and will need to include the following:
Existing Suppliers - On a periodic basis, you will want to get a financial health score (FHS) updated for each supplier. This will include all public companies with material impact also being updated. Once you have this information, dive into the FHS score and this will determine whether or not you need to escalate to Finance for further review. Once finance does assessment, set up a meeting with all departments involved (Finance, Procurement, and Business Owners) and make a decision to continue with the supplier or disengage.
New Suppliers - Much like existing suppliers, all new suppliers will need a FHS as well. The steps will be virtually the same, and you will need to do a thorough analysis of their FHS score and determine if you want to proceed or disengage. All FHS scores should be maintained in your supplier database and business owners should provide thorough visibility into FHS scores for existing suppliers and future sourcing events.
It is important to be aware of the new supplier setup cycle time. This could be the critical path item for new supplier setup, especially for private companies. For existing companies, be sure to eliminate any personal bias, and don’t let a cash-starved company drag your organization down with it. This is especially true for smaller companies, as there is much more personal accountability among smaller organizations. Abide by their financial health scores (FHS) to determine whether a supplier should be utilized or not.
Getting Started With Your Supplier Financial Viability Assessments
Being a part of a supplier bankruptcy for the first time can bring significant distress to an organization, in which the supplier financial viability assessment will provide the relief needed to eliminate the possibility of being blindsided in the future. While this assessment can certainly be created in-house, having an outside individual with extensive experience can aid in the development of this tool and provide insight into any areas that may be overlooked.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
