Rapid Ratings Blog

3 Strategies to Help Minimize Impact of Supplier Disruption

Posted by RapidRatings on June 29, 2018

What to do before, during, and after a supplier disruption

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A catastrophic fire at the facilities of Meridian Magnesium Products of America, the world's largest producer of magnesium components for automakers, has created a parts shortage, affecting the supply chains for Ford, GM, Fiat Chrysler, BMW, and Daimler. The impact on automakers was severe. Ford was forced to temporarily lay off 3,600 workers and shut down half the production of the company's best-selling vehicle, the F-150 pickup truck because of parts shortage. In addition, the Fiat Chrysler Windsor Assembly Plant in Windsor, Ont., Canada, which assembles the Pacifica and Pacifica Hybrid, has had to shut down its lines. GM temporarily halted production of its full-size vans at its Wentzville, Mo., plant, the only facility that builds the Savana and Chevrolet Express vans.

The Meridian Magnesium fire spotlights supply chain vulnerability and the cost of disruption, and begs the question – what steps can companies take to maintain business continuity and minimize the impact of unforeseen disruptions? While there’s no single answer or silver bullet to preventing supplier disruption, those companies that prioritize risk management efforts before, during, and after an event, are best positioned to remain resilient and minimize the impact to their brand and their bottom line.

3 Strategies to Minimize Supply Chain Disruption

First and foremost, it’s impossible to completely prevent business continuity disruptions from taking place. However, when armed with the right predictive analytics, procurement teams can ask the right questions to ensure that the likelihood of a risk event is as low as possible, and the effects can be managed appropriately. By assessing financial health both before, during and after the event, appropriate action plans can be implemented by cross functional teams throughout the organizations. Here, we’ll provide a snapshot for how our most advanced clients use financial health to manage their risk.

  1. Before the Event – Financial health helps you understand which suppliers might be prone to a disruption, enabling you to step in, understand and mitigate problems before they escalate.

  2. During the Event - The Financial Dialogue can highlight key financial concerns you should be raising with your supplier to address their ability to continue investing in their operations.

  3. After the Event - Understanding the financial health of your suppliers can not only show you their ability to ‘weather the storm,’ but it can also inform the next steps you may or may not need to take with that organization.

For a deeper dive into how leading organizations are minimizing supply chain disruptions, check out our infographic, "Geopolitical and Economic Risks Are on the Rise."

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Before and During the Event: How to Spot the Financial Red Flags

A supplier with both a high Financial Health Rating* (FHR®) and Core Health Score** (CHS®) indicates that company is both performing well and efficiently generating returns. It has the capacity to invest in operational improvements, capital equipment repairs, research & development, and other initiatives that make it a strong long-term partner.

Weakness in either score however, raises a red flag, which should prompt a conversation. The prompt should be especially strong because of the link between Financial Health and operational performance. Data from our clients suggest that financially unhealthy suppliers are twice as likely to provide ‘very poor product quality’ and nearly three times as likely to provide ‘very poor delivery performance.’ To not only combat negative outcomes before they occur, but also to understand a supplier’s ability to perform and deliver when a disruption does take place, our clients use our Financial Dialogue to identify the areas of highest concern and pose questions of their supplier. The ability of suppliers to answer and quell the concerns of our clients dictate the direction that the relationship of the two companies goes.

 After the event: How Financial Resilience Informs Your Action Plan

It is unlikely that financial disruption or complete failure will occur with a supplier that has strong financial health. Along the same lines, it is unlikely that operational issues will arise as well. After an event, the supplier is well positioned to reinvest capital back into its operations to improve its performance. When a natural disaster occurs or new regulation is passed, it’s likely that the supplier will be able to respond and adjust to avoid a catastrophe for our clients.

On the other hand, if you may know the disrupted supplier is a sole-source supplier with poor financial health, as Meridian was for so many automakers, for instance, then the strain a disruption places on their business can seriously impact yours. In this scenario, our clients will sometimes choose to supply a temporary capital injection or an expedited payment plan to provide them some liquidity. The provided funds can help the supplier survive and continue to deliver the necessary parts so as not to disrupt normal operations. The resultant expenditure may cost our client some money, but the short term hit pales in comparison to the revenue cost of not delivering a specific product to market, or the potential brand hit of failing to do so.

It's only a matter of time before any organization is hit with a serious disruption that impacts its operations. Organizations that have focused on collecting data and measuring the impact of a potential disruption to their business are now learning that actioning against that information is harder than previously thought. Making the connections between the right analytics and next steps can be the difference between a mitigated disruption, or a potential long-term headache for every team affected.

*Financial Health Rating measures a company’s near-term likelihood of default of disruption.

**Core Health Score measures a company’s operational efficiency and medium-longer term ability to sustain its operations.

Topics: Third-Party Risk Management, Market Events, Supplier Risk Management