How smart companies are using financial health analytics to reduce risk and build resiliency in their global supply chains.
In a world where global supply chains are increasingly intertwined and more complex than ever, all it takes is one weak link to disrupt the smooth flow of goods and services.
From missed deadlines to unmet requirements to trade disruptions, the source of the unpleasant surprise is often a supplier whose weaknesses wind up damaging a company’s brand reputation, customer service, and bottom line.
“Surprises make business hard,” says Jeffrey Graham, director of finance for supply chain at sports apparel manufacturer Under Armour. A few years ago, the company expanded its enterprise risk management program to include more focus on vendors. To strategically assess its vendors’ ability to deliver, Under Armour leverages several indicators including financial health.
“We always hear rumblings in the supply chain world,” says Graham. “Is a vendor late on payment? Are there rumors of an acquisition, merger, or joint venture that might expand our opportunities to work with them? We want to be proactive. Financial health data helps us avoid surprises, to get ahead of problems, or capitalize early on an opportunity."
Supplier Risk Management to Gain a Competitive Advantage
As Under Armour and many other companies have learned, good supplier risk management strategies and supplier risk solutions such as predictive analytics can provide high levels of visibility into potential supply chain risks. In some cases, those risks simply can’t be seen by the naked eye. However, when you add advanced technology platforms and systematically operationalize the results, visibility into the potential problems and opportunities increases exponentially.
Companies that use supplier financial risk assessments, and that track and respond accordingly to key risk indicators (KRIs), can elevate their supply chain visibility while building healthy, resilient supply chains. Here are five ways they’re accomplishing this:
1. Building and cultivating strong supplier relationships. Many companies, including Under Armour, have shifted toward a mindset of strategic collaboration with their suppliers. By partnering to solve problems, buyers and suppliers can succeed. “We view our vendors as strategic partners, so we have to keep current on what’s going on with them,” Graham says. “We both end up investing a lot in those partnerships, and staying current ensures that those arrangements remain mutually beneficial. This affects both long- and short-term contracts.”
2. Conducting Supplier Evaluation Ratings across all supplier tiers. To be most effective, supply chain visibility must go beyond Tier 1 suppliers. But understanding the health of all aspects of a company’s end-to-end supply chain can quickly get complicated. Gathering and evaluating data for multiple vendor tiers in a company’s value chain can add up to hundreds of companies. Managing this complexity is a full-time job that most supply chain professionals are not prepared to handle on their own. Under Armour, for example, uses RapidRatings to track the financial health of a vast array of companies across two tiers: cut-and-sew vendors and raw material suppliers. Combined with other intelligence, the financial health rating helps the manufacturer strategically evaluate its vendor relationships. “RapidRatings is helping us level this playing field,” Graham says, “by providing transparency similar to what public companies have.”
3. Leveraging KRIs to gain proactive visibility and build resiliency. As the measures that help you understand how “risky” an activity is, KRIs provide early signals of high risk exposure. By correlating with specific risks (e.g., a new supplier that’s in an unfavorable financial position), KRIs provide early warnings that help companies identify potential interruptions that could harm their operations. Using these early warning signs in tandem with operationalizing strategies such as risk thresholds or contingency plans will improve decision-making and circumvent the negative impacts of supplier risk. Moreover, taking a proactive over reactive approach will reduce customer perception of assumed risks and move companies towards risk resilient growth.
4. Offering strategic support to struggling partners. The ability to assess companies, both public and private, in depth and in scale, provides insights into problems in time to take action. “If a strategically important partner who represents 60% of your business is financially at risk, perhaps you could acquire them,” Phil Renaud, executive director of the Risk Institute at The Ohio State University, says. “Or you might institute some key performance indicator triggers in your contracts with them. Or maybe you could offer a short-term loan or other help with financial stabilization.”
In this era of increasing market volatility, uncertainty, and disruption, companies must make end-to-end supply chain risk management a bigger focus. Understanding the data and key risk metrics needed to effectively evaluate supply chain partners will be of utmost importance. By getting the metrics right and evaluating supply chain risk, organizations can build supply chain resilience; build stronger relationships with their customers and suppliers; and improve competitive advantage.
Learn more about how Under Armour uses several different risk indicators and predictive financial models to build a more resilient supply chain in this whitepaper.