Keeping your procurement operations running smoothly is challenging, no matter what stage of business you are in. Both new and established businesses can face an uphill battle in balancing their spending whilst still delivering revenue and profit gains.
This is true even in times of strong economic growth, so our current volatile conditions are putting markedly more pressure on procurement teams to make the right decisions.
With the construction industry in the headlines for all the wrong reasons, global supply chain issues impacting the majority of sectors, zombie businesses barely scraping by, and seemingly bullet-proof companies falling into insolvency, it’s more important than ever to be aware of who you’re doing business with and sourcing how their financial management can impact your business.
Procurement: An Essential Business Function
Procurement covers a range of different tasks and processes from simple purchase orders to bids and tenders, all of which fall under the umbrella of business spending. From purchasing raw goods used in manufacturing to evaluating subscription software services, procurement is a complex dance that needs to balance the right level of risk and reward in order to power a profitable business and implement successful risk mitigation.
Product, supplier and service options all need to be carefully considered so that the business has enough resources to function efficiently, but not too much that cash flow is negatively affected.
This balancing act presents several potential risks/issues for procurement professionals.
Who you choose to do business with becomes a critical link in the chain of your business operations. This is where prcourement leaders can really add value: by understanding the key issues and how to overcome them, you can reduce risk whilst still positioning the business for success.
Supply Chain Risks and How to Manage Them
1. Not Understanding Supplier Risk
Suppliers might look good on paper and have a slick sales team and good prices, but it’s their underlying methodologies to financial management that reveals whether they are going to be an asset or a liability for your business.
CreditorWatch’s data shows that over 50 per cent of businesses with a payment default against their name will go into administration within 18 months, which could leave your business plans in disarray if you are heavily reliant on a supplier to deliver your product or service to customers.
Risk Factors such as cross directorships, payment defaults and credit enquiries from finance companies are often shielded from view when businesses don’t have the right data to lean on. Deteriorating payment behaviour is often the first sign of bigger problems, so investing in comprehensive credit reports helps you understand who you’re dealing with and put into place a risk management plan.
2. Not Actively Monitoring Creditors
Whilst monitoring debtors is widely practiced – most financial teams have a strong handle on their debtor situation – it is less common to monitor creditors with the same intensity. Robust invoicing and follow-up practices are likely already in place for customers, but what is the current creditor landscape like in your business?
By using accurate data and flexible tools you can perform your due diligence and risk management process by checking if your suppliers have been flagged for any adverse activity. Using automated monitoring and alerts to your advantage will help you understand how risky it is for the business to become involved with a specific supplier.
Red flags like defaulting with other suppliers can provide an early warning so that you can take preventative measures, managing risk and lessening the impact on your operations.
3. Failure of Suppliers to Deliver
The impact can be severe if a major supplier fails to deliver the goods and services, you need for your business to operate and function successfully. Whilst your creditors may still be able to supply to some degree, understanding their capacity to serve your account is a key consideration in the initial evaluation stages.
This is often well researched by procurement teams in the consideration or tender stage, however, ongoing monitoring is less common and a gradual reduction in service levels can be a symptom of hidden financial issues. Cash flow issues can manifest as late or incomplete deliveries, slower supply, poor support and service, and lack of communication – all issues that can appear after an initial period of good service.
By implementing supply chain risk management strategies such as preliminary credit checks coupled with ongoing monitoring, can build a picture of the financial health of your suppliers both now and into the future, ensuring you understand their capacity to deliver.
4. No Plan B
If a key supplier was to go into administration tomorrow, would your business be prepared? Leaning too heavily on one supplier relationship can expose you to several risks, the main one being that a lack of diversity in your supply chain can critically impair your operation if something goes wrong.
Whilst it’s tempting to build strong creditor relationships and become increasingly intertwined with preferred suppliers who provide good service, if the worst happens, your business will need a Plan B.
Maintaining lines of communication with alternative suppliers or allocating a portion of your total spend to a secondary supplier gives you built-in redundancy that can serve to keep your business afloat if a major supplier collapses.
The Solution: Monitoring and Assessment with CreditorWatch
Ultimately, reducing risk in your procurement operations comes down to having the right data available to make good decisions. CreditorWatch helps organisations with risk assessments, external risks and financial monitoring and alerts, ensuring you are the first to know if any adverse activity is detected.
Financial risk assessments provide a comprehensive look into the financial viability of your suppliers. By assessing the reputation and financial stability of the businesses you work with, you can choose the right trading partners and safeguard business growth. Financial Risk Assessment reports help procurement teams confidently make decisions and mitigate risks.
To find out more about CreditorWatch’s suite of tools for procurement professionals, get in touch with us today.