It seems like only in the past year, during the worst of the recession, did many procurement departments realize that the ability to read financial statements and assess the financial health of their suppliers was important. In many cases, the procurement team realized this fact too late. The upshot is that awareness of the importance of supplier financial analysis was raised.
The bad news is that many suboptimally educated procurement departments now seem to incorrectly believe that supplier financial analysis isn’t important anymore since the economy has started to show signs of life, growth, and fragile stability. This attitude was reflected in a couple of third-party blog posts related to consultants’ observations of their client’s priorities.
First, Debbie Wilson of Gartner described her recent “Heat Map,” which is designed to illustrate the changing priorities of procurement leaders, and wrote that the “Coolest [i.e., declining priority] topics include services procurement (down from Q3); procurement MDM (level from Q3); and vendor vulnerability assessment.”
Second, Supply Excellence posted an entry entitled “Supplier Risk: Shift from financial to operational” that featured an audio clip in which Ariba’s Bob Zieger said that “we are definitely seeing…a shift from more attention [on] the financial aspect of risk to the operational risk.”
While I will be the first one to tell you that a procurement department needs to adjust its focus regularly as the business world changes, forgetting about evaluating the financial health of your current and prospective suppliers is a bad move. A growing economy does not guarantee that your suppliers will be immune to declining financial health. To drive this point home, consider that there were over 600,000 bankruptcy filings in the year 2006 – a year that the Economic Policy Institute called “a respectable year for GDP growth.”
By comparison, slightly over a million bankruptcies were filed in 2008 – the year that what some call “The Great Recession” really took its grip. So, even in a respectable year of economic performance, there were still more than half of the bankruptcies seen in one of the worst economic years in recent memory.
Does that put the importance of supplier financial analysis into perspective?
Suppliers can go out of business regardless of the economy. Zieger even couched his report on his clients’ sentiment by stating that “It’s always important to maintain an eye on your suppliers’ financial condition. That goes without saying” and procurement leaders “shouldn’t lose sight…of the financial condition of their suppliers.”
Supplier bankruptcy should never be a surprise in good times or bad. There were obviously unpleasant surprises in the past couple of years due to not enough focus on knowing how to assess supplier financial strength.
Are we headed back to an environment when we choose to be oblivious to supplier financial health issues?
I sure hope not.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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