Dive Brief:

• A recent survey of 1,000 buyers and suppliers by THOMASNET.com and Dunn & Bradstreet revealed a mismatch in the procurement process, where suppliers were unaware of the importance of credit ratings to their buyers.
• Roughly 84% of buyers said financial stability was an important metric before building a supplier shortlist, with 63% having eliminated a candidate due to a poor credit profile. Yet, 65% of suppliers did not believe they had ever lost business due to a poor profile although 40% did not know their company's credit status.
• Buyers' selectivity is justified by experience: 47% of respondents could cite examples of being "burned by supplier financial risk," with 9 in 10 of these stating the incident had happened at least once in the last five years. But only half of suppliers said they would consider a service to improve their credit profile.

Dive Insight:

Financial stability is an often forgotten aspect of supplier-buyer relations, at least until one party is burned by the other's liquidity problems.

While bankruptcies are the most notable examples, poor credit can often reflect poor payment practices or high debts that could result from, or in, mismanaged disruptions. Both of the latter examples can be far more troublesome and strain relations in the long-run. Credit will not always be the top determinant in a supplier selection process, but the survey shows many will look at it and raise a red flag when given a choice.

Yet, to place the burden of liquidity solely on the supplier is a disservice to the importance and influence of their buyers. The supply chain is a business in relationships, and often times an unbalanced relationship with a buyer will force suppliers into unsustainable practices that could harm their credit in the long-run.

Recent examples include General Motors' bankrupt supplier Clark-Cutler-McDermott, which now alleges the automaker consistently forced unsustainably low prices on the dependent supplier. Or, more commonly, the many instances of buyers extending terms of payments, which has the side effect of disrupting the suppliers' cash flow and stretching a company's emergency capital reserved for demand surges.

In other words, both buyers and suppliers should think long and hard about why financial stability is so important to the procurement process. The answer often reflects a desire for a long-term, healthy relationship — but if that is the case, both sides must make sure they are doing their part to keep financial risk at a minimum.