SCDigest Editorial Staff

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Just 18% have procurement policies that set a limit on the level of dependency that can be reached with a specific supplier. Among those companies that have such policies, the average dependency threshold was about 35%. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

The deep economic gloom of 2009 caused many companies to increase their efforts in monitoring the financial status of key and even mid-level suppliers buffeted by the decline in demand and selling prices. (See What are the Best Ways to Estimate Supplier Financial Risk?)

Such financial analysis has long been an important element of supplier management strategies, and is likely to remain a high priority amid the lackluster economic recovery and intense global competition.

CAPS Research, and arm of Arizona State's Institute for Supply Management, recently released a short benchmark report on how corporations approach assessing supply financial strength, based on survey results from 161 (mostly very large) companies, primarily US-based but with a decent representation of global enterprises as well.

Not surprisingly, the vast majority (92.5%) of these companies said they regularly monitor the past financial performance and current stability of key suppliers.

What triggers this kind of analysis? Naturally, this research is often part of the supplier evaluation/certification process (73.8%) or pre-contract award evaluation (76.5%). 73% said they also monitor the financial condition of suppliers sometime during the contract period.

Perhaps surprisingly, only 29.5% of respondents said their companies triggered this kind of financial analyses when their spend with a supplier reached a particular threshold. The average spend threshold for those that do have such triggers was $695,000, though many had a threshold of just $250,000.

However, there were dozens of other triggers that companies said could trigger a financial review of a supplier at their companies, from pre-paying for materials to level of business risk (e.g., sole supplier) to Dun & Bradstreet notifications.

What are the Key Financial Documents and Elements?

Of course, it's one thing to decide to do a financial analysis on a supplier, and another to decide how to do it.

CAPS asked respondents what data "elements" or documents and filings were most important to them in conducting a supplier financial analysis. As shown in the graphic below, a supplier's payment history to their own suppliers was the most commonly used metric (82.3%) from a historical perspective, followed by profitability and activity (several metrics that measure a firm's ability to convert different accounts within their balance sheets into cash or sales) ratios and basic financial statements, all used by about 75% of respondents.

(Sourcing and Procurement Article - Continued Below)

Most Common Financial Elements and Sources Used

for Supplier Financial Analysis

Source: CAPS Research

What is perhaps most interesting about this data is the relatively modest use of "forward looking" data sources by respondents - though getting these kinds of estimates are of course a big challenge versus historical data.

Managing "Dependency"

In addition to a supplier's overall financial condition, its "dependency" on the company's purchase volumes for its revenue and profit is also something many companies consider.

Only 43% of companies actually track that dependency ratio, which CAPS defines as "total spend with a supplier divided by the supplier's annual revenue."

Just 18% have procurement policies that set a limit on the level of dependency that can be reached with a specific supplier. Among those companies that have such policies, the average dependency threshold was about 35%. Some companies reported having dependencies thresholds of a low as 10%.

Somewhat confusingly, just some 40% of companies said the supply management organization was responsible for notifying suppliers of their over-dependent status. What function is responsible in the other 60% of companies is not clear.

What's the takeaway from this relatively brief report? There does not seem to be any clear "best practice" with regard to supplier financial analysis, something procurement professional organizations and others probably need to work on. When it comes to concern about "dependency," there seems to be a great divide, with some companies very concerned about this issues, and others not at all.

Any reaction to this CAPS benchmark data? Is "dependency" something more companies should be concerned with? Do we need more "best practice" definition" about how to do this? Let us know your thoughts at the Feedback button below.