Dive Brief:

• Supply chain managers should devise strategies to collect information on their suppliers' financial risk in order to avoid sudden large scale disruptions due to a supplier's liquidity problem, according to a recent article on Procurement Leader Magazine.
• Businesses can fail for a variety of reasons — from long-term loss of market share to increasing costs and late payments by customers — so it is not uncommon for one-of-hundreds of suppliers to cease production due to business failure. In fact, 25% of 450 respondents in an Achilles consultancy survey claimed they had suffered a related disruption, according to the article.
• Procurement employees should maintain consistent communication with suppliers or collect data based on Z scores, when possible, to track their supply chain's financial risk and prepare buffers against disruptions. Stocking up on inventory, diversifying suppliers, switching suppliers, installing pre-pay options to provide suppliers liquid assets on demand, and even considering investing in suppliers are good potential solutions, according to the article. 

Dive Insight:

Calculating supply chain risk is a complex task with many moving parts, and it is often the supply chain manager's job to ensure all the links are functioning properly. A supply chain manager must focus on creating strategies for cyclical or predictable risks, like weather or the risk of a missed shipment, as well as plans for unpredictable risks. 

By collecting financial information on suppliers — even through periodic or informal status reports collected by Procurement — the company signals to suppliers it appreciates transparency and creates an opportunity for companies to increase inventory in anticipation of supplier risks. Having a single supplier with high-financial risk, for example, would be a red flag the company may need to diversify or create a backup plan. By contrast, having multiple suppliers of the same good at the same level of financial risk would signal consolidating demand may not be a bad idea. 

The process may be difficult at first, but could lead to a high pay off and increased communications with suppliers, which is always good.