Smart procurement is no longer about just saving money or getting “the best deal”. Procurement is a strategic activity that contributes towards business success and, increasingly, that success can be achieved through identifying and mitigating risk.
The most common risks involve either selecting inappropriate goods and services, or selecting inadequate suppliers of those goods or services. Further, choosing appropriate suppliers is not just about the quality of their output but, additionally, it’s about their ability to deliver – and continue to do so.
We’ve seen significant product failures or delays caused by weak links in the supply chain, and those adverse events are likely to continue in subdued trading conditions as competition increases and margins are squeezed.
Rising financial risk
Businesses around the world have been understandably cautious in the wake of the Global Financial Crisis, which saw the collapse of trusted enterprises. Many organisations were forced back to square one, looking for new sources as their suppliers collapsed. And there are knock-on effects which often remain hidden. Do you know how many of your suppliers’ suppliers are on shaky ground? Or how many have switched to cheaper, less established offshore suppliers?
Where we once assumed that all was well unless we saw signs to the contrary, the new risk management regimes require a more conservative approach, coupled with even greater transparency. It has never been more important to understand the strength and viability of suppliers.
No purchaser wants to enter into a supplier relationship with a business that’s at risk of failure, or behaving in a manner that, by association, could lead to reputational risk. It is therefore becoming essential for organisations to know more about their supply chain than ever before - and that includes their financial viability.
Refining procurement criteria
TenderLink is now part of the Dun & Bradstreet network and is the only procurement services provider that has direct access to market-leading credit analysis, tools and a wealth of business information.
This connection allows our clients to tap into a range of authoritative reports on business health, from credit history to profitability and payment patterns.
We are already seeing enlightened organisations adopting these reports in their procurement processes. Where the contracts are significant in terms of size, scale or strategic importance, it makes sense to seek an independent, third-party analysis of the potential providers’ ability to deliver on the requirements - and to continue to do so.
There are, of course, several options. A financial risk report can be required as a mandatory bidding criterion for every prospective supplier. Thus, just as they need to prove their technical competence and product suitability, prospective suppliers would also be expected to demonstrate their financial stability for their bid to be considered compliant.
Clearly, this places an additional obligation on bidders and may deter some from participating in the tender. Many already find the tender process onerous and time-consuming and, understandably, would resist any additional cost of doing business. But in some sectors, where competition is intense, it is no longer unusual for bidders to arm themselves with third-party financial reports attesting to their financial stability in order to reassure potential purchasers and differentiate themselves from the rest.
Another option is to seek financial reports only from shortlisted parties. Interested parties are informed upfront that, should they make the shortlist, they will be required to provide evidence of their solvency and creditworthiness. This reduces the burden on potential bidders and should not impact on the number of participants in any competitive process. It also acts as a deterrent, since businesses with anything to hide may be reluctant to participate, knowing that their financial health will come under scrutiny.
Finally, the purchasers themselves can run a risk report on the successful bidder as part of a final set of due diligence checks. This removes the onus from the bidders but places an additional cost on the purchaser. However, we’d strongly argue that such a cost should be seen as a prudent investment in risk mitigation. Certainly, for any vital supply elements, procurement has an obligation to fully understand suppliers’ ability to deliver – and, clearly, financial viability is a core element that needs to be both investigated and satisfied.
Additionally, we are seeing the onus of proof flipped such that purchasing organisations are providing financial risk reports on their own operations as an inducement to would-be suppliers. Justifiably, suppliers are equally as nervous about their customers’ ability to pay as the purchaser is about supply certainty. By demonstrating their creditworthiness and prompt payment history, purchasers can establish themselves as ‘customers of choice’ and can benefit from increased competition for their spend, while also securing favourable terms.
In an environment of increased business risk, procurement has a vital role in linking organisations with their suppliers. Amid rising supply chain complexity, it makes sense to use any tools at your disposal to understand the market and the potential pitfalls associated with key partners. Against that background, purchasing organisations need an assurance that their suppliers are stable and dependable. Credit reports can play a significant role in allaying such fears, therefore providing increased confidence and reduced risk in ongoing supply.