Supplier Solvency Warning Signs

How Do You Know If Your Supplier Is In Financial Distress?

PurchTips Edition #395

With publicly-held suppliers, it is relatively easy to identify when they are having financial trouble. You acquire their latest annual or quarterly reports online and apply your financial statement analysis skills to determine how healthy they are.

With privately-held suppliers, your access to information is far more restricted. However, here are three warning signs to look for to determine if one of your privately-held suppliers is experiencing financial duress. They don’t necessarily guarantee that a supplier is hurting, but they should compel you to conduct a closer examination of a supplier’s solvency.

Cutbacks Affecting The Supplier’s Identity.  Think about how some of your suppliers identify themselves.  A supplier may be the only one in their industry offering 24×7 support.  Or a lifetime warranty.  Or some other benefit that obviously costs money, but has made that supplier the best known name in their field.  Cutbacks are naturally always going to be part of a business.  But when a supplier starts cutting back on the very thing that attracted customers in the first place, it could be a sign of desperation – that cuts in less important areas weren’t enough to sustain the supplier.

The 3 CFO Rule.  A key to financial stability and growth is having a steady hand managing the company’s money.  That’s usually the job of the Chief Financial Officer.  It’s not unusual for a CFO to depart for a better job or retirement.  But if a company goes through three CFO’s in 2-3 years, it could be a sign that money isn’t being managed well and the people who are hired to fix certain problems simply can’t fix those problems.

Desperate Supplier Communication.  New suppliers will aggressively offer discounted pricing to get their “foot in the door” of a market already occupied by incumbents.  But when an established supplier starts behaving like a new one, it can be concerning.  Financially healthy suppliers will walk away from deals that are bad for them.  As much as we in procurement love low prices, it’s troubling if a once-strong supplier recklessly offers discounts to the point where you know there is very little profit margin left for them.  A healthy profit margin is key for a supplier’s long term solvency.  Having a supplier go bankrupt when you are counting on them to perform won’t be justified by savings you achieved earlier.

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Copyright 2018. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By Charles Dominick, SPSM, SPSM2, SPSM3