Uncovering The Blind Spots Of Supply Chain Financial Risk

It will come as no surprise to many organizations that the financial health of supply chains the world over is deteriorating.

Exacerbated by the coronavirus crisis, supply chain risk is on the rise as more businesses struggle to remain viable in a volatile market.

“With the disruption of the market this year, there have been a lot of vendors struggling financially,” said Taylor Allis, chief product officer at Avetta. “They’re going out of business, unfortunately, or are on the verge of bankruptcy.”

It’s a doom-and-gloom observation, but there is an optimistic outlook ahead. As Allis told PYMNTS in a recent interview, today’s deterioration of supply chains‘ financial resiliency has led to a heightened focus on how to improve the overall health of organizations’ suppliers. It’s vital for businesses to understand where their risk blind spots are, however, and to strategically work with the business partners that can contribute to a more stable business ecosystem.

A Risky Supplier Strategy

For many large enterprises, there may be an area of operations that is too reliant on too few vendors. In markets like telecommunications or gas and electric, it’s common for an organization to depend on a single vendor for key repairs or equipment maintenance in certain areas.

It’s one of the biggest blind spots in supply chain risk management, said Allis. If one of these suppliers is financially unstable, whether due to a lien against their business, unpaid bills, debt or other cash flow challenges, the demise of that vendor can cause massive ripples of disruptions throughout the rest of the supply chain.

“The ability to see and predict which vendors could be having fiscal issues, so you can quickly source and replace them if needed, is one of the biggest issues we’re seeing,” he noted.

To address this pain point, Avetta recently rolled out Avetta Financial Risk, a collaboration with Experian that allows organizations to access financial metrics about their business partners. The risk score ranges from 1-100 and considers 800 variables to understand how likely it is that a supplier may go bankrupt or default on existing obligations like loan or invoice payments.

“It gives a wealth of intelligence, where now you can say, ‘in this one facility that needs to continue running, I’m dependent on one main vendor that’s got a very high risk score. I need to be proactive there,'” said Allis.

Promoting Financial Health

Supply chain risk management is an increasingly important component of organizations’ strategic sourcing strategies. Enhancing visibility into financial risk allows for quick action, like ending a relationship with a supplier and onboarding a new, less risky one.

But there are opportunities for organizations to not only avoid these risks, but to also contribute to the overall financial health and resiliency of the supply chain and vendors.

That could mean continuing business with existing vendors that have low risk profiles, and ensuring that suppliers are paid on time so they don’t face their own cash flow challenges. According to Allis, a focus on other risk factors can also help an enterprise understand which suppliers deserve more business.

“I may see there is a supplier that may be having some financial difficulty, but they’re a very safe supplier,” he said. “They provide great safety protocols, and they’re a leader. You can see top leaders in safety and drive more business to them.”

Positioning financial risk analysis within the broader context of multiple risk categories can help organizations understand whether to cut ties with a supplier, maintain relationships or help a struggling business partner.

This fosters a spirit of collaboration within supply chains that is much-needed after an unprecedented span of volatility. Indeed, Allis said he has an optimistic outlook for the supply chain management industry looking ahead, and there will be more opportunities for firms to contribute to the resiliency of their supply chains as digitization progresses.

Strategic sourcing will also be key for organizations looking to outsource more work to contractors and third-party vendors, while risk mitigation, said Allis, will increasingly involve analysis of organizations’ environmental and safety policies and procedures.

“Because people have to be more agile in their operations, they’ll rely on contractors and supply chain vendors more,” he noted. “They need to flex up and down their business based on the ups and downs of the economy. Typically when that happens, businesses tend to outsource more and depend on the supply chain a little more.”

Being strategic about which vendors they rely on will be instrumental in keeping operations flowing – and keeping more firms in business – in the months and years ahead.