The importance and challenges of evaluating the financial health of ALL suppliers

Understanding the financial risk of doing business with a supplier or vendor is vital to an organization’s long-term stability. This is why having ALL suppliers undergo a comprehensive financial condition analysis is a must in order to prequalify and assess the financial stability of every potential and current supplier, not just the big ones.

Majority of procurement teams today fail to conduct a proper evaluation of the financial risk associated with each vendor for two reasons: lack of exposure to proper financial analysis tools and the fact that the company deals with the same set of suppliers over and over again. The first hurdle can be overcome by leveraging the latest technology that gives companies access to tools that are quick and easy to deploy while the latter fails to take into account that significant changes to industries and organizations happen sometimes overnight

Adapting to Change

Every company is continuously adjusting to changes in the industry and within their operations. This applies to vendors and suppliers as well. As a buyer of services or products, firms need to know that they can count on their suppliers for the long run. Regularly assessing the financial stability of potential and current suppliers on a regular basis would provide the adequate information needed to make the best decisions for the company as a whole.

Purchasing and supply professionals have a responsibility to monitor the financial health of their suppliers as interruption of a critical supply source, due to supplier’s bankruptcy or weak financial position, can be devastating to a firm’s ability to meet customer needs. Accurately evaluating the financial risk associated with each supplier before forming a business contract and relationship with them, which can be done through a technology-driven financial condition analysis tool, is a must in these fast-changing times.
Reference: "Evaluating the Financial Condition of Suppliers"; International Supply Management Conference

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