If the credit crunch had a negative impact on clients, what about suppliers?  When the credit freeze started to impact supply chains, credit management switched into liquidity management, concentrated on cash flow and workout.  A trend that is expected to last at least for 18 to 24 months according to a BIIA survey of credit managers and underwriters.   However if customers feel the pain of the credit crunch, so do suppliers.  This one reason as to why companies today are focusing more and more on the financial status of suppliers.   Supplier relations rest usually with purchasing, however this is hardly a place for financial expertise, hence companies are now calling upon the financial and analytical expertise that resides in credit departments to be used in the effort to help ensure the continuity of critical supply chains.

Supplier liquidity is key to maintaining lines of credit.  During the past two years companies had to content with limited availability of bank credit. This has hampered some suppliers in their ability to maintain proper levels of financing and cash flow as banks have become reluctant to loan money. The credit crunch, therefore, has prompted more companies to obtain an overall picture of the bank financing of their suppliers.   Bank loans and lines of credit often contain covenants or rules such as maintaining a certain level of cash flow. Once a loan holder breaks any of these rules the banks have the right to pull their line of credit.  If a supplier were to lose bank financing it could seriously jeopardize the ability to continue producing and delivering quality products and services.  Worse yet cash flow problems usually manifest themselves in poor quality and disruptions in deliveries.  Once the quality problems have reached end users, brand reputation and profitability is in peril.

Failures of suppliers to deliver their products or produce quality products are costly to companies.   Jim Lawton, senior vice president and general manager of D&B supply Management Solutions (SMS), pointed out that “according to the Corporate Executive Board’s Finance and Strategy practice, over the course of three years a supply chain disruption can cause operational costs to rise 11 percent and decrease sales growth by 7 percent and reduce shareholder returns by another 35 percent.  Supplier failure has a negative effect on the operation of the supply chain as well as the company’s overall financial performance and the quality of the product being produced.” Although Lawton was referring to manufacturing supply chains, companies that provide services can also incur significant financial losses.

These are compelling reasons for companies to turn to credit management to assist procurement in maintaining uninterrupted supplies.  Source:  Credit Research Foundation News / D&B Supply Management Solutions

BIIA has posted a number of articles on supplier risk assessment in the BIIA Library.  SPEND MATTERS,  the largest media site for sourcing, procurement and supply chain covered D&B’s supply management and risk strategy in a four part article which we posted on:  BIIA Industry Library Archive:  Supplier Risk Management – Tools and Solutions

BIIA Newsletter June I – 2010 Issue