All organisations must be aware of and manage risks relevant to their operations.
One of the most notable risks a business can be impacted by is that of the financial well-being of their supplier base.
Financial stability and sustainability
Financial stability and sustainability of suppliers is important to ensure a consistent and robust supply-chain, whether that be for products or services provided.
When your organisation is evaluating a partnership with a new supplier, or a continuation of a partnership with an existing supplier, there are several key criteria that should be considered as part of that process.
The current global business climate is a catalyst for rapid change, those organisations that have an agile approach to risk management may find themselves in a stronger position, or more able to take advantage of developing opportunities.
For this reason, organisations should regularly monitor their existing and potential suppliers to identify risks to ongoing financial stability.
In the current global economy, the dependency between supply chain entities has increased, however the risks to those supply chains have also increased.
In particular, within Original Equipment Manufacturers (OEMs) there seems to be trend of transitioning significant design activities and production responsibility to Tier 1 suppliers; a external organisation that provides parts and materials directly to a manufacturer of goods.
Supply chains must be able to support new product launches, to bring dormant production facilities back online, to ramp up production to meet increased demand and to sustain long term commitments; whilst addressing issues associated with raw materials and-components shortages.
Contracts specify the framework of agreed performance criteria, between your organisation and your suppliers.
The financial wellbeing of your suppliers may compromise their ability to deliver against these established contractual obligations, leading to a potential failure in the supply chain.
Financial instability in your supply chain may lead to, but is not limited to, the following outcomes:
- Late deliveries,
- Obsolete technology/low efficiency,
- Poor quality or low levels of service,
- Inability to meet warranty obligations
- Inability to provide adequate aftersales support
To mitigate risk during periods of economic transition organisations need to implement additional monitoring of their supplier’s financial status. An unforeseen downturn or upturn may cause stress to a company’s line of credit, working capital or cash flow.
It is commonly the responsibility of an organisations supply chain management function to reduce costs, mitigate risk, prevent business disruption and protect brand equity.
Determining a supplier’s financial strength will support an organisations strategy and will help evaluate whether a supplier can meet its obligations, or if there is a need for interventions.
Financial performance is a strong indicator of the likelihood that a company will continue to trade or will cease business operations, losing a supplier at short notice may have a dramatic impact that initiates a domino effects throughout an established supply chain.
The unplanned loss of a supplier can also generate the following outcomes for your organisation:
- Financial losses,
- Loss of revenue,
- Violated contracts,
- Damaged reputation with your organisations customers.
Financially stable and sustainable suppliers
When a supplier can demonstrate a strong financial health status, it can enhance long-term partnerships with your organisation, including but not limited to:
- Access to preferential terms and supply rates,
- Stronger credit terms,
- Opportunities for investments in new manufacturing equipment and technologies,
- Higher levels of product quality and service.
Financial evaluations resources available to you
Financial statements can convey a complete overview of a supplier’s financial health, assessing each of the financial statements in detail can help your organisation analyse the risk from perspective of a suppliers’ financial wellbeing.
Resources that can reflect the financial health of a supplier may include, but are not limited to:
- Balance sheets,
- Income statements,
- Cash flow statements.
In many Countries these three financial statements are available at the official company registry, however they can also be requested directly from the suppler or viewed online.
Non-public companies should be willing to provide their Financial Statements upon signing a Non-Disclosure Agreement (NDA).
Using Financial ratios to identify future performance levels
Financial ratios, the measure of the relationship between financial figures and financial statements, can be used to make forecasts on the future performance of your suppliers.
By analysing a set of financial ratios, you can identify trends in, profitability, liquidity, operational efficiency and solvency.
Ratio analysis can also provide a company’s performance measures over time so that they can be compared with the performance levels of other companies in the same industry.
Alongside the financial aspects already presented there are a number of alternative qualitative measures that should also be considered, these include but not restricted to:
- Creditors: What banks back your supplier? How many debts does the supplier owe the bank? How much of this debt has the supplier extinguished to date? Is the bank a reliable source of funding?
- Type of Debt/Financing: What type of debt or equity has the supplier raised or have access to? Will these sources of funding be available in the future?
- Company structure: What is the nature of any affiliated sister or parent companies and how does the supplier sit strategically within the group organisational structure?
- Location: Where will products or materials be dispatched from and are there any potential logistical risks?
- Business history: What are the company’s corporate values and business ethics?
Case Study: Global Display Solutions
Global Display Solutions (GDS) has always promoted the philosophy of long-term partnership and therefore emphasises the importance of establishing business relationships on transparency, quality and stability.
Monitoring and reporting on GDS’s financial situation is a cornerstone of our long-term business relationships, ensuring a robust and continuous commitment between all parties.
GDS confirms its financial stability via the use of a globally recognised financial assessment agency, Cerved, who assess and evaluate the creditworthiness of non-financial companies and debt securities.
Cerved repeats this financial assessment annually, producing a detailed report that identifies the sustainability of the future business, the organisation and the financial capacity to be successful over the long term.
The current rating assigned to GDS is that of A3.1.