Don’t Forget to Check Your Suppliers and Their BC Capabilities
With the U.S. economy severely shaken, the number of suppliers facing financial peril is on the rise, according to Ernst & Young LLP Transaction Advisory Services (TAS). Supplier instability is putting added strain on U.S. companies already battling the fallout of the economic downturn on many other fronts.
According to an Ernst & Young LLP poll conducted in January 2009, 67% of companies would be adversely affected if one of their top three suppliers failed – an indication that supply risk is emerging as a key operational risk factor.
The financial health of immediate suppliers is not the only key factor; companies are also subject to the collective financial positions of all those on which their suppliers rely.
“A supply chain is only as secure as its weakest link,” said Mark Short, partner, Ernst & Young LLP TAS. “In a complex, integrated supply chain, the likelihood that a critical supplier will encounter financial duress grows exponentially. The risks associated with supplier failure are further exacerbated by the current economic turmoil: companies are being engulfed in weeks or even days, leaving unprepared companies without recourse. Even companies with contingency plans in place find themselves unprepared to react as quickly as market forces demand.”
According to Ernst, it is incumbent upon executives to implement a program of supplier-focused risk identification and management. To minimize supply chain disruption, companies need to
- enhance their due diligence and predictive modeling as it relates to mission-critical suppliers,
- establish a program to respond to troubled suppliers before the situation gets out of hand, and
- update or augment their knowledge and resources relating to potential exit strategies within bankruptcy and associated actions.
A well-managed supplier monitoring process, coupled with a proactive action plan to work with troubled suppliers or quickly resolve distressed supplier situations will positively affect a company’s relationships with its customers as well as its alternative suppliers. To be successful, company leaders are 1) sticking to original payment terms unless there’s a distressed situation, 2) focusing on being more proactive in communicating with their suppliers from a financial performance perspective, and 3) for the more critical suppliers, developing contingency plans if they sense a supplier may be or is in financial difficulty.
Tags: Business Continuity Management, Risk Management, supply chain management, Surveys
