Assess Supplier Financial Risk Now!
PurchTips - Edition # 163
By Charles Dominick, SPSM
Can Your Suppliers Survive The Credit Crunch?
Stock markets are at 5-year lows, banks have failed, and lending practices have tightened. Governments are promising intervention, but will it be fast and effective enough to prevent the global credit crunch from claiming some of your suppliers? Use this three-step model to assess your supplier's financial risk now to prevent a severe supply disruption later.
Step 1: Identify Your Critical-To-Operations Suppliers. Make a list of all the spend categories where you are sole sourced. Rate each spend category on the Difficulty and Time required to find and qualify a new supplier. Does the time to find and qualify a new supplier exceed your normal inventory levels? If yes, you have identified an immediate threat to operations if the supplier fails.
Step 2: Evaluate Supplier Financial Risk. Insufficient capital is a leading cause of supplier failure. Aging payables, slower inventory turnover, delayed expansion plans and a decrease in available credit are additional early warning signs of supplier financial risk. Liquidity ratios like the Current Ratio are good indicators of financial solvency because they measure your supplier's ability to pay short-term debts.
Determine your supplier's Current Ratio by dividing Current Assets by Current Liabilities. These figures are easy to get online for publicly-held suppliers but you may have to use expert negotiation skills to persuade privately-held suppliers to disclose them. As an example, if your supplier has $750,000 in Current Assets (cash, receivables, inventory, etc) and $900,000 in Current Liabilities (debts due within one year) then their Current Ratio would be 0.83. A common rule of thumb is that a Current Ratio of 1.5 or greater indicates the supplier can sufficiently meet near term operating needs.
Step 3: If Necessary and Practical, Help Your Supplier Survive. If you determine that a key supplier is on the verge of failure, your options include finding a new supplier, buying more stock than you usually do to secure your supply while infusing the supplier with cash, helping the supplier locate sources of capital through your company's bank, or even recommending that your company consider investing in or buying the supplier.
(keep reading for a FREE Offer)
Spotlight On Professional Development Opportunities
Are you tired of not getting enough opportunities, respect, and money out of your purchasing career? Well, guess what? Nothing will change unless you take action towards becoming a world-class purchasing professional.
Earning your SPSM® Certification by completing the Senior Professional in Supply Management® Program is the action to take if you want to bring the most modern purchasing practices into your organization and achieve your career potential. Learn how to earn your SPSM® Certification (and perhaps get an iPod) at:
The Latest Purchasing News
- Forget Google, Try PurchSearch! PurchSearch is a new search engine for purchasing professionals. Unlike Google, it indexes only authoritative purchasing Web sites so you can find high quality purchasing information quickly, without the clutter. Try it yourself at www.PurchSearch.com or watch a video demonstration at http://tinyurl.com/4cojzo
- Purchasing Managers/Directors: The fourth quarter is a critical time for planning how to improve your team's skills and performance in 2009. We can help you build a roadmap for improvement. Learn if you qualify for our FREE purchasing skills benchmarking service at: If so, visit: www.NextLevelPurchasing.com/benchmark
Worried about purchasing job security? The report "Career Survival in Supply Management" can help you.
"Career Survival In Supply Management,"follow the instructions at