FSC Rules based risk management in the sourcing process:
FSC Rules based risk management in the sourcing process: The drive to develop leaner supply chains and introduce global sourcing has resulted in extended, more complex and vulnerable supply chains. The same pressures have also seen an increasing trend for many companies to adopt single sourcing to maximize their pricing leverage.
Such practices have placed significantly more risk in company supply chains, which is now further exacerbated by the credit crunch.
As a result, managing risk in the supply chain is on the rise and understanding and managing the portfolio of risks facing supply networks today is critical to maximizing business performance. Companies now view supplier failure as the number one concern as a potential threat to company supply chains, placing financial supply chain (FSC) risk management in the spotlight at a time when best practices are still evolving. Other risks include shortages, natural disasters, IP infringement, and partnership failures etc.
Rules based Sourcing Criteria:
Buyers can ensure such risk are managed consistently and effectively by developing a “rules based” decision making framework as part of their initial sourcing process to ensure risks are addressed satisfactorily. Such a framework should:
- Assess the impact on your business should the supplier become bankrupt.
- Request financial disclosure for critical suppliers and built this into the contract. This should facilitate regular review during the contract management process and ensure the buyer secures advance notice of pending financial difficulties.
- Ensure you know not just your suppliers but also their suppliers.
- Ensure your contract has clear language and management procedures to allow you the right to review critical operational and financial data.
- Promote understand of suppliers banking relationships
Managing the risk of supplier failure involves analysis of supplier’s balance sheets, profit and loss accounts, and budgets. The result of this assessment determines both the supplier’s credit requirements and its ability to secure it.
Clearly the ability to obtain such sensitive information will depend upon both the leverage and relationship you have with the supplier. Nonetheless, buyers need to ask these questions during the sourcing process and evaluate suppliers based upon their response before making decisions.
Sourcing rules can then be developed to include:
- The number of suppliers – sole/multiple
- Countries of origin – LCCS vrs lower risk countries
- Financial strength- of the direct supplier and extended suppliers
- Benefits sharing
- Sources of funding
End to End Management:
When making their assessments it is important for buyers to consider the financial supply chain in its entirety across the multiple layers of suppliers as well as how each party links its performance with the next partner in the financial supply chain, in terms of process, cost and credit availability.
The difference between the lower funding rate of a financially stronger buyer and the higher rate of the supplier provides the potential to create benefits for both parties. The advantage for the buyer is that, on the back of such financing programs, it becomes possible to extend payment terms and re-shape the balance sheet and liquidity position. Suppliers can also benefit from the lower cost of funds, reduced working capital and lower days sales outstanding.
Supply Chain transparency:
Buyers need to develop transparency in their supply chains and align their physical and financial supply chains to ensure they are closely integrated. Only by understanding each supply chain event can buyers achieve this.
Alternative Sources of Funds:
With the current liquidity crisis in the financial markets, it is vital for buyers to think about alternative sources of funds, including supply chain finance (SCF) alternatives. These programs are more likely to be sustained by banks during difficult times, compared with typical commercial lending instruments such as short-term loans and overdrafts.
Coordinating the different facets of risk management within an overarching FSC program is seen now a key priority within a growing number of organizations.
Risk factors should be addressed during the sourcing processes as well as being supported within a robust SRM program. The key success factors buyers must address if they want to significantly improve risk management and efficiency in the financial supply chain are:
- Consider the supply chain end-to-end.
- Share advantages; supply chain partners are unlikely to give up a benefit without something in return.
- Transparency is paramount and that can only be achieved through a thorough understanding of supply chain events and reviewing the relevant transaction finance data.
- Collaborate with critical suppliers to set up ERP interfacing funding platforms to facilitate visibility in the financial supply chain.
- Collaborate closely with your colleagues in finance.
Remember that best practices are still being tested.
Nuff said …