Supplier financial risk lies at the core of disruptions, per procurement pros

Dive Brief:

Supplier financial issues are one of the major categories of value chain disruptions, leading to performance, delivery and quality issues, according to a recent report by ProcureCon Indirect East and RapidRatings.
The report surveyed 88 procurement executives at the 2017 ProcureCon Indirect East conference to find that 33% had suffered a "significant" supplier risk event, and only 14% had a resilience strategy in place.
In addition, more than 50% of the respondents said they do not actively track supplier financial health after onboarding, although many of the aforementioned disruptions originated with financial issues.

Dive Insight:

The State of Risk report highlights that supply chain risk is not being taken seriously. While the sample size is relatively small at 88 respondents, those attending the 2017 ProcureCon Indirect East conference would be considered quite invested in best practices, including managing supplier risk.

One consideration is that indirect spend still does not command the interest and importance of their direct spend cousins. While failure in the indirect supply chain still can still have a sizable impact an organization, there are often more reasonable and cost effective methods of remediation should there be a disruption. Perhaps that adds to a level of comfort, but it shouldn’t.

While this study reports that 33% of respondents have experienced a significant supplier risk in the last two years, one might think that number is understated. Consider that prime or lower tier suppliers may have identified and corrected issues before they metastasized and impacted the customer. While the buyer may someday be made aware of the potential disruption, often time companies operate on a ‘no news is good news’ approach.

The research accurately reports that financial issues are the most commonly cited cause of supplier disruptions, but discussing the financial health of suppliers is often considered the third rail of supplier relationships … a dangerous ‘high voltage’ area where suppliers are careful not to share confidential financial information. Public companies must file financial statements to meet regulatory compliance, but those reports often hide issues like cash flow constraints that impact daily operations. Privately held companies are not compelled to publish their financials. Ignore supplier finances at your own risk.

A lack of a supply chain resilience strategy, as admitted by 86% of the survey respondents, borders on professional malfeasance. Organizations may not have a disruption strategy for all of their commodities but critical to mission suppliers must be identified and alternatives considered as part of a strategic approach to supply management.

The importance of indirect spend, long ignored or deployed to non-professionals, is gaining ground in procurement circles. Addressing risk in the indirect supply chain should be following right behind.