Though the worst of the global recession is clearly behind us, and many hope a more robust recovery lies not too far down the road, companies still face much supply chain and bottom line risk from suppliers struggling to keep out of bankruptcy court or failing all together.
So say Hans-Kristian Bryn and Michael Denton, both consultants at Oliver Wyman, who argue a new approach needs to be taken to address and predict potential supplier financial and operational failure.
In a new report, Bryn and Denton note that the lukewarm recovery means there are many firms across the globe still in dangerous financial territory. US bankruptcies are up 126% since the start of the recession in 2008. That's no surprise, but Mariarosa Verde, an analyst at credit rating company Fitch Ratings, says while low lending rates have kept many companies afloat for now, if US economic growth does not get above 2% soon many more companies are likely to go under.
In fact, Fitch downgraded the credit ratings of 23.2% of the companies it followed during 2009 while only upgrading the credit ratings of 6.6% of industrials. Those were primarily large companies. The financial condition of smaller suppliers could be even more dicey.
As a result, "supply chain risks have moved from the province of engineers into the realm of chief financial officers and treasurers," Bryn and Denton write in a recent report on the topic.
What are the Real Costs of a Financially Week or Failed Supplier?
Bryn and Denton argue that the true cost of a supplier in weak financial condition or one that ultimately fails is often larger than most companies realize or measure.
That's in part because, they say, "the metrics companies use to evaluate the impact of a supplier failure are often too simplistic. Companies often fail to take into account that the more they push out to potentially less secure suppliers, the more they are often obliged to use their own balance sheets to support suppliers," and that there are a variety of other costs that companies incur when they are forced to replace a failed vendor.
There are also changes going on in the credit ratings industry that may make their numbers less useful than in the past for assesssing supplier risk, Bryn and Denton say. They also note that the increased reliance on offshore suppliers makes use of US credit ratings agencies and other tools often less practical than for domestic suppliers.
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