How to monitor the financial health of suppliers

Harry John

During the pandemic, the financial pressure ratcheted up on suppliers and the need to track their financial health moved back to the top of the agenda.

The procurement team at a multinational telecommunications company were looking for ways to monitor supplier financial health during the panic of the 2008 global financial crisis. Fearful that it would throw many suppliers into insolvency – affecting the company’s ability to meet its customers’ needs – the procurement team utilised data sources like Bloomberg and Dun & Bradstreet (D&B) as a way to monitor supplier financial information.

Updates on the health of suppliers were provided regularly but as the crisis eased off so did the frequency of the reports. The issue as a whole slipped down the agenda.

Then Covid-19 happened. The financial pressure ratcheted up on suppliers and the need to track their financial health moved back to the top of the agenda. The team knew their previous approach had to evolve and it needed to be more effective and more consistent. Effective management of supply chain risk requires collaboration, which is impossible unless the function stays abreast with suppliers’ financial information.

Investing in finance

With the help of finance, the team built a dashboard that would allow them to clearly see updates on the health of the company’s critical suppliers. This list of suppliers was created by prioritising them in terms of product delivery, the impact they were feeling from Covid-19, the location of their headquarters as well as the company’s annual spend with them. Finance manages this dashboard and runs a bi-weekly supplier financial health analysis based on information provided to them by procurement as well as those external data sources the company had always relied on.

This information is fed into an algorithm, which gives each supplier a risk score on a scale of 1 – 8 (8 being the highest level). If a supplier gets a rating of five or above, an alert is sent to category leads who follow-up with those firms and proactively address the issues to determine what support and action is needed.

Does it work?

Yes. During the Covid-19 pandemic, none of the company’s suppliers fell into bankruptcy. A practical and effective solution that didn’t require a lot of investment – an especially encouraging example at a time when a lot of procurement functions are worried about the financial strains that may emerge moving forward.

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