RapidRatings Blog

Supplier Relationship Management: Leveraging Financial Health Assessments

Posted by RapidRatings on January 15, 2019
iStock-539440276

Reliable operations require a robust supply chain. Here’s how one company is using financial health assessments to create competitive advantage, provide extremely high levels of customer service, and maintain profitability.

Moving more than 120 million airline passengers is no easy feat. Focused on preserving its brand image while offering high levels of customer service to its valued client base, Southwest Airlines relies on its supply chain partners to keep its business running smoothly—and around the clock.

“Here at Southwest, it’s not just about our own financial performance,” says Bob Chojnacki, senior supplier performance manager. “We can basically either be the hero or the guilty party for the passenger who needs to get to his or her destination on time.”

“Making that happen requires a wide network of product and service suppliers, all of which converge to make up Southwest Airline’s end-to-end supply chain.

“We have a loyal customer base and we expect the same from our suppliers,” Chojnacki says. “Reliable operations require a robust supply chain. We want suppliers to be with us for the long term, so risk management is important to us.”

Best Practices for Optimizing Supplier Risk Assessments

Southwest’s risk management strategy didn’t formulate overnight. Just 10 years ago, in fact, the company focused primarily on procurement, “buying and sourcing things as we needed them,” Chojnacki explains.

Fast-forward to 2018, however, and Southwest has built out a more robust risk management program, including leveraging financial health as one of its KRIs, using the Financial Health Rating (FHR®) to find suppliers and vendors that can support the airline over the long haul.

“If they’re not financially sound, our suppliers and vendors won’t be able to support us,” says Chojnacki, “and they may not be able to support us in a time of crisis.” In an era where many other airlines have either gone out of business or been acquired, Southwest doesn’t want to worry about its suppliers going out of business or being financially insolvent.

Understand these best practices used to develop and plan a robust supplier risk management program like Southwest:

1.     Build internal support for risk management efforts. Getting everyone on board with the effort means being able to get the funding and support needed to put a robust supplier risk management plan into action.

2.     Find the primary risk areas. Assess the main areas of potential risk—based on the probability of these risks leading to disruption—and address them first.

3.     Consider how a disruption will impact customers, brand, and ultimately bottom line. When supplier disruption happens, it doesn’t only impact the company that’s buying the products/services, it can also hurt customers, business partners, and the buyer’s brand. “If we have unhappy customers, we can’t maintain the revenue stream we count on to keep things rolling,” Chojnacki points out.

4.     Explore alternate sources of supply in case of disruption. Be aware of how easy/hard it will be to switch to those alternate suppliers.

5.     Understand supplier business continuity and supplier risk management strategies. Ask questions like, does the supplier have the resources necessary to recover in the case of disruption? Just how quickly will that recovery happen? Also consider whether those suppliers have similar risk management strategies to prevent against N-tier disruptions (and if so, how robust those strategies are).

6.     Finally, take proactive steps to reduce risk exposure and build resilience across the entire supply chain. Rather than “waiting for something to happen,” get out in front of the problem by working through the first five steps above on a regular basis.

Combined, these factors help Southwest effectively assess supplier stability before a disruption occurs, or worse a supplier bankruptcy. “We depend heavily on our suppliers and integrate them into our processes,” says Chojnacki. “We feel that data like FHRs provide us with a competitive advantage during supplier selection and program reviews.”

Focusing on Stronger Supplier Relationships

Southwest understands that the foundation of the most effective supplier risk programs value loyal relationships and recognize that partnering to solve problems is the best approach in today’s disruptive business environment. The most effective programs will: 

  • Understand that improved transparency empowers better shared planning and risk management
  • Require clear and specific conversations to develop partnerships
  • Set the tone for success early in your relationships
  • Enable regular reinforcement (risk management is not a “set it and forget it” exercise).

“Financial health is often used to build better relationships,” says RapidRatings’ Brian Sica. “Only when you understand your suppliers’ core strengths and weaknesses can you fully leverage your supplier relationships while delivering high levels of customer service.”

WATCH NOW

For more on building a proactive supplier risk management program to create a competitive advantage, watch this on-demand webinar.

  

Topics: Supplier Risk Management, Risk Assessment