Benefits of Supplier Financial Risk Assessment for Companies

Posted by Ankit Kohli on January 11th, 2016

Suppliers are indeed the lifeblood of organizations. Regardless if you are providing a product, service, or a combination of both, you are likely to depend on contractors, vendors, and suppliers fulfilling their contracts and working according to your agreements. Companies and suppliers maintain a symbiotic relationship. However, the same mutual reliance introduces risk to business. A study that surveyed 209 companies with global footprint found that disruptions within supply chains lead to a 3 percent or greater drop in the financial performance of businesses. Some 60 percent of the respondents noted this kind of supply chain trouble. There is, however, a way to minimise the risks introduced by these third party partnerships and this is through supplier financial risk assessment.

Gathering and monitoring key financial aspects and essential information such as revenue, continuity plans, financial references, and third party ratings of contractors and suppliers will help organisations minimise and augment inevitable risks that come with business-supplier partnerships.

The level of risk that suppliers introduce to companies largely depends on the type and the volume of goods or services being supplied. This said, some suppliers and contractors may be more critical to your operations than others that only play a small role, and thus present less of a threat to your operational continuity.

Supply chain disruption due to supplier failure can lead to a wide range of issues and can cause a domino-effect (chain reaction) of consequences, ranging from compliance issues to loss of productivity, consumer dissatisfaction, and overall reputational damage. It is for these reasons that assessing supplier financial stability is critical to minimizing your financial risk. By understanding where your partners' potential vulnerabilities and financial weaknesses lie, you can be better equipped to manage each and minimise the risk of damage to your company.

A supplier's financial health deteriorates because of their inability to grow revenue, low profitability, liquidity issues, dependence on specific consumer segments, and solvency issues. Assessing these kinds of financial risks can help you minimise them and at the same time increase business confidence with each brand new project that comes your way. To assess the financial stability of your third party suppliers, it is critical that you pursue in-depth research and gather relevant data on important aspects of their financial health, ranging from their annual revenue to their financial references, business continuity plans, credit ratings, debarment searches, legal searches, and mergers and acquisitions. Assessing risk is critical to making important business decisions, and if you don't know where to start, it is best to consider third-party assessment solutions to ensure the financial stability of your partners without straining your firm's resources.

About the Author:

Pure Research provides customised research and business intelligence to corporates, public sector organisations, financial services firms, and professional services firms worldwide. The company delivers high quality procurement and supply chain intelligence to procurement professionals and their organisations. It provides business and market intelligence to strategy and marketing teams at corporations, and to professional services firms. Pure Research also provides customised financial research and ESG research to financial services firms. Analysts from Pure Research work as an extension of their client organisations to deliver high quality research and insights. The company has offices in London, U.K. and Delhi, India.