Rapid Ratings Blog

Culture Shift in Supplier Relationship Management: Three Benefits of Treating Suppliers Like Partners

Posted by Rapid Ratings on May 15, 2017
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The supplier/buyer relationship has traditionally been a very transactional exchange, historically focused on getting the lowest price with reliable delivery. Driven by the perceived risk of being replaced at any time, suppliers had no interest in flexibility or offering other value-adds, often at their own detriment. Fortunately, many companies have since rethought this approach and have come to embrace supplier management as a discipline, focused on creating overall value beyond the transaction. By shifting to a more strategic mindset in working with their suppliers, much like they do with their business partners (customers, JV partners, etc.), companies grow into more focused, nimble, and cost-effective global competitors.

Three Benefits of Commercial Transparency in Supplier Relationships

Embracing a relationship based on transparency and collaboration allows both parties to help each other create synergies, and perhaps most importantly, grow together. Here are the top three benefits of emphasizing commercial transparency in the supplier/buyer relationship:

1. Improve risk management – Knowledge is power when it comes to risk management. Understanding a supplier’s key strengths and weaknesses allows you to more effectively plan for the future. Transparency optimizes your ability to make decisions around resourcing, disruptions, reputational risk, and more. Having more knowledge and making better decisions means fewer costly surprises in your supply chain.

2. Enhance stability, operational resilience, and business continuity – Supplier collaboration helps stabilize the supply chain. Greater visibility into supplier risks results in faster recovery from disruptive events or the ability to collaborate on risk avoidance strategies together. By having continuous and open dialogue with suppliers, companies can address issues within the supply chain and react more quickly.

3. Uncover hidden opportunities – As your company grows, you need to know if your suppliers can grow with you. Increased and ongoing communication allows you to know your supplier more deeply, understand your supplier’s future growth potential and therefore alignment with your expansion goals.

Financial Health Facilitates Transparency in Business Relationships

To fully realize the mutual benefits of a partner relationship, companies must understand the supplier’s strengths and weaknesses, which can be achieved by looking at their financial health.  Since the typical organization will have hundreds of thousands of suppliers and other third parties, an automated and scalable approach to financial health assessment is absolutely critical.  To see how we dissect financial health, request a complimentary Financial Health Rating (FHR®) report on any public company.

Request a Free FHR Report

Beyond providing insight into a supplier’s operating efficiency, financial health analysis will help you understand whether your supplier is able to invest or raise capital to grow and scale with your company. Having an open dialogue about financial health will also help you identify the issues that could prevent them from delivering goods or services with the quality and timeliness required for your business.

Benefits of Supplier Communications: A Case Study

A perfect example on how the benefits of a financial dialogue can offer greater transparency in your supply chain is when Paramount Resources executed a radical turnaround of their financial situation in less than a year. In 2015, Paramount Resources was in financial distress at a FHR of 26, which put them in our High Risk category. Without open dialogue about the company’s future plans, the supplier relationship manager working with them likely would have implemented backup plans and exit strategies. Yet, bankruptcy never came. Instead, the company took dramatic actions to completely turn around their financial situation. A sale of assets to Seven Generations Energy in July 2016, deleveraging, and creatively maintaining an upside in the assets sold showed nimble execution on management’s part in remediating the company’s situation all the way to a Very Low Risk FHR of 82 by the end of 2016.  How could Paramount’s customers have known about their future plans?  By asking the right questions.

Download the Paramount Resources Financial Dialogue to see what questions to  ask its management that would have revealed their strategy for improving their  financial condition.

Download Financial Dialogue Report

Financial Dialogue: A Guide to Supplier Conversations

Our Financial Dialogue report guides you through this process to provide actionable insight and valuable questions to ask suppliers irrespective of your financial training, enabling you to have the right conversation at the right time. If Paramount was your supplier last summer, the Financial Dialogue report would have highlighted the company’s profit margins as one of its main areas of concerns. With an operating profit margin (328.5%) and net profit margin (232.2%) both at a loss, you might’ve asked:

  • Which aspect of your business was primarily responsible for the negative returns?
  • What are your profitability improvement plans?
  • Do you expect to produce positive returns in the coming fiscal year? If no, how long do you expect you can sustain ongoing losses?

Whether your main goal is to manage supplier relationships, prevent disruptions, or protect your bottom line, the key comes down to transparency.  With operational transparency, you can use the numbers to understand the red flags within your supply chain, and then have an informed conversation about the future plans of your supplier or create the best synergies. Trusting your suppliers will be able to meet your business demands requires a shifting mindset – it defies the traditional transactional exchanges and works towards building a partnership. 

Topics: Supplier Risk Management, Third-Party Risk Management, Bankruptcies & Default Studies