Stop Reacting to Risk and Get Creative With Your Vendor Financial Screening

Stop Reacting to Risk and Get Creative With Your Vendor Financial Screening

supply chain risk events

Published July 10, 2014   •   1 minute read

Working with only safe, reliable vendors is always a goal for any risk manager. However, In Deloitte’s supply chain risk report, The Ripple Effect, they uncovered a surprising statistic about supply chain risk programs. Risk managers at half of the companies with active supply chain risk programs said that their own company’s risk program is probably not very effective at dealing with supply chain risk.

Effectively screening vendors ahead of awarding a contract not only means ensuring they are properly insured and licensed, it also means screening them for financial red flags and likelihood of the vendor suffering supply chain interruption due to bankruptcy, litigation, or cash flow problems.

Supply chain related bankruptcies are still high and can be sudden. Although only 44,111 US businesses filed for bankruptcy in 2013, a decline from the height of the financial crises, experts believe many more businesses probably should seek chapter 11 filing protection, but do not because of the stigma associated with doing business with a company going through chapter 11 restructuring. As a result, many vendors may be perilously close to shutting their doors and causing a supply chain interruption for clients, without presenting obvious warning signs.

The reason supply chain risk programs are not always effective is because many of the top cited strategies companies use to mitigate risk are reactive, not precautionary.

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It is important to financially screen vendors to ensure you do not award a contract to or rely on a supplier that is in poor financial health. For privately held companies this can be difficult, since those vendors are understandably reluctant to reveal private financial information about their company.

For privately held companies where financial information is difficult to obtain, BCS has a solution that can turn your reactive supply chain risk program into a proactive strategy that works.

BCS has developed a proprietary and unobtrusive survey that asks privately held vendors to simply provide financial ratios that permit comparison to accepted industry values, without requiring them to reveal detailed sensitive financial information.

BCS then collaborates with our clients to develop and utilize a scoring tool for their supply chain vendors. Vendors provide ratios which are then processed into a composite score, which is derived from a weighted summation of various financial data points collected and compared.

The vendor’s financial viability score is presented to our client in a simple, easy-to-understand report, allowing them to retain a good relationship with their vendors while ensuring they continue to only work with financially healthy vendors.

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