The good news is that most risk managers are helping to improve supply chain resilience… But too many corporates still don’t scrutinise their critical suppliers’ finances well enough

supply chain

Most risk managers are active in improving their supply chain resilience, but are failing to properly check the financial stability of critical suppliers.

According to the StrategicRISK Supply Chain 2016 survey, almost four in five (78%) respondents have incorporated risk management processes into their supply chain management approaches, and more than half (56%) have provided risk training to their supply chain management team.

This is an encouraging result, considering that all respondents said a disruption to a critical supplier would have an impact on their business – be it ‘significant’ (65%) or ‘limited’ (35%).

Risk training graph

Commenting on the results, Myanmar Brewery head of risk management, internal controls and processes, and board member of the Pan-Asia Risk and Insurance Management Association, Jagath Guru, said: “In today’s highly competitive, complex and interconnected supply chain environment, we cannot over-emphasise the importance of helping external stakeholders such as partners and service providers (and the third/fourth-tier suppliers) with risk management through training.

“I see this as an excellent opportunity to faciliate engagement with stakeholders, provide better visibility of the supply chain and, consequently, provide assurance of compliance with legal/regulatory requirements and a resilient supply chain.”

The task has its challenges, however.

Guru, like many other risk professionals, said a key issue is “getting stakeholder buy-in for risk management training and designing a training programme that would meet the respective stakeholders’ needs”.

On the downside, however, many corporates are putting themselves at unnecessary risk by failing to properly check the financial stability of their critical suppliers.

Just over half of respondents said they had timely systems for measuring suppliers’ financial health (see below).

“Frameworks for measuring financial stability are either not in place or are inconsistent across business functions,” one respondent said.

Another remarked: “While in place for some operations, it’s not consistent across all.”

Worryingly, some respondents admitted that carrying out the checks may be no more than a box-ticking exercise.

“We collect credit/financial information of these suppliers, but I’m not sure if these indicators are truly sufficient,” said one.

Many respondents said suppliers’ financial stability and performance was reviewed as part of their onboarding process and again at contract renewal.

Zurich Global Corporate global supply chain product leader Nick Wildgoose said that while this is a good start, it may not be enough for all suppliers.

“Due diligence may be once a year. But where [the supplier] is critical to your business, you need to be monitoring them more often than that,” he said.

“Also, when suppliers are in difficult territory, like Hanjin Shipping [which went bankrupt in August] for example, I don’t think it’s a good assumption to operate on the basis that the government’s going to keep bailing them out forever.”

Wildgoose’s comments echo the results of the Business Continuity Institute’s 2016 survey on Supply Chain Resilience, which saw supplier insolvency come 10th in the list of concerns around supply chain disruption events.

To improve resilience, Wildgoose recommended companies identify their most profitable products/services and then look at the suppliers that are critical to delivering these. The answer may not necessarily be the supplier that the company spends the most amount of money with.