6 responses so far ↓

• 1 David Rae // Feb 10, 2009 at 5:03 am

  Interesting post, Justin. I find the whole philosophy of risk absolutely fascinating. So to do the readers of Procurement Leaders magazine (a point backed up by the popularity of an upcoming event we’re hosting in New York).

  The problem with S&P, however, is that it’s all based on historical data. For procurement executives the secret isn’t learning how many companies are defaulting but which companies WILL default.

  That’s the real risk, but it takes a lot more digging to unearth the type of tell-tale signals which can alert procurement professionals to the chances of a supplier going under…

• 2 Tim Minahan // Feb 10, 2009 at 8:36 am

  David:

  Actually, I’ll take responsibility for not being clearer in my post. (Something must have been lost in my U.S.-to-U.K. English translation.) S&P is projecting that the current default rate (~5%) will increase to nearly 14% by year end. This projection is not solely based on backward-looking historical: “Relevant credit metrics in the U.S. show continued deterioration of
  credit quality and adverse lending conditions, contrasted with the first signs
  of life among new issuance,” said Diane Vazza, head of Standard & Poor’s
  Global Fixed Income Research Group.

  In short, the supply chain is about to experience an Nuclear Winter. And spend managers must take appropriate measures to detect and shore up against supply risk.

• 3 Jason Busch // Feb 10, 2009 at 8:55 am

  Most Supply Excellence readers will probably forget this, but Tim was the first analyst to publish a detailed benchmark study into risk years ago when he was at Aberdeen. It was the report that got everyone buzzing on the subject. Much of its findings are still prescient today. Tim, so what do you say about getting Ariba into the supply risk game on a broader level — both from a thought leadership and the product side. Your customers are going to start asking for it and there’s a dearth of offerings in the market. Unfortunately, even though we’d all rather blog about savings, I’m afraid it’s going to be the added cost of supplier bankruptcies, disruptions and quality issues that capture our headlines in the coming 12 months as the recession takes hold.

• 4 David Rae // Feb 10, 2009 at 11:39 am

  Apologies Tim, I think I referred to you as Justin on my first reply…

  I do understand that S&P’s is predicting a huge increase in defaults over the next year what I really want to know, however, is which suppliers are most at risk. And not just by industry or region, but at a granular level.

  How can procurement execs find out whether their suppliers are really at risk of financial ruin? What are the tools available to them?

• 5 Tim Minahan // Feb 10, 2009 at 2:44 pm

  Jason:

  I guess I’m tipping my hand. You are right that our customers are asking for support in supply risk assessments and management. The Ariba Spend Management Services (SMS) team now offers a formal supply risk assessment service — a hot offering among retail and auto sector clients at the moment. On the solution front, stay tuned for our next release.

• 6 Tim Minahan // Feb 10, 2009 at 2:45 pm

  David:

  To answer your question on what companies can do to detect and mitigate risk. Here’s a snippet from a previous post:

  +Audit the financial, operational, and balance of trade exposure of your most strategic and mission-critical suppliers. Too often investigation of supplier solvency and dependencies are limited to the initial sourcing project. You need only to open a newspaper or turn on the nightly news to realize that the health of even the seemingly most stable companies can degrade quickly.

  +Look for early warning signs. Drops in quality or shipment delays can be indications that the supplier has cut too deep into its operations. More frequent requests for early payment or changes in sales and support personnel should also raise a red flag. While these symptoms may not necessarily belay supplier troubles, they should warrant further investigation.

  +Increase the frequency of supplier performance reviews. Aberdeen Group research finds that, of those companies doing regular performance reviews with suppliers, more than two-thirds conduct these on an infrequent basis — quarterly, semi-annually, or annually. In the face of highly volatile markets where credit is tight, you should step up these reviews to at least quarterly with your most strategic and mission-critical suppliers and semi-annually with your next tier of suppliers.

  +Pay close attention to issues like balance of trade and the underlying market dynamics for the materials that comprise inputs into your suppliers’ products. Spend Management execs report that these reviews also serve as prime opportunities to identify additional cost and waste reduction ideas.

  +Automate your supplier management process. The above steps may be time consuming, but well worth the effort, considering the risk avoidance potential of these actions. Leading spend management organizations are simplifying this process by leveraging supplier management tools that combine self-service portal for suppliers to publish and manage their own profile information (and workflow for routing supplier profiles for review and approval); scorecarding and performance measurement utilities; and project management capabilities for corrective action management. Use of such tools can both improve visibility and control of risk and enable you to extend supplier management to a broader portion of your supply base.

Leave a Comment