In the old days, a company really only needed to worry about the credit worthiness of their customers.  The credit department would monitor the accounts receivable balances and watch the buying history to make sure the customer was able to pay for the product that they purchased.  If a customer needed more product, or there were concerns about the ability for the customer to pay, the credit department would set up some alternative financing (cash up front, letter of credit, etc.) against the customer.  It was normal business, your supplier did the same thing to your organization.

Time have changed, now days with an over optimized supply chain, a hiccup upstream will have an adverse reaction to the flow of goods and services out of your organization and in turn all the way downstream to the consumer.

One of the hiccups can be a supplier of products, raw material or services going bankrupt. 

This is happening more and more in today’s economy.  Once thriving organizations are no longer to keep financially afloat and are reorganizing or closing their doors.  To help mitigate this type of risk, many companies will multi source, with the expectation being that if one supplier has financial problems, there are others who can provide your organization with the products needed to satisfy your customers demands.  Additionally, a periodic review of the supplier’s financials (through a credit reporting organization such as D & B or Best) can help identify potential issues down the road.  Your credit manager can provide a quick analysis, or set standards for you to monitor.  If the company has financial issues, it is time for a frank discussion on the viability of the organization and a team review of the business continuity plan that would be put in place if the supplier was no longer able to provide product.

But what happens when the supplier in question is farther upstream?  If your direct supplier’s  supplier of raw or other material, or a service provider is caught in a financial bind. In many instances your supplier may not provide you with information on who their supplier is.  The visibility of a problem upstream is not as visible to you and may also cause your secondary sources to have stock outages or be unable to provide the things you need.

To minimize this risk, I suggest several alternatives.  First have an understanding of the sources your supplier may be using and monitor the industry/suppliers on a global basis.  Second, help your suppliers by requiring them to provide a copy of their risk management plan.  During the contract process you can outline the types of risks that they should monitor and the communication and contingency plan they have developed in the event one of those uncertain items arrises.  They don’t need to provide names and sources, but they should provide a general overview on how they will protect your supply chain while under their control.

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