Supplier criticality and financial risk loom in the retail supply chain
Assessing supply chain risk nowadays is no simple task given the endless list of potential factors that lead to errors or delays. Supplier-related risk grows exponentially as networks expand further into emerging markets or outside of their “comfort zones” as we’re seeing today with movement to avoid China due to tariffs; or strategies of “China + 1” to begin movement outside of the country. Greater risk comes hand-in-hand with supply network changes. As uncertainty continues on the economic and political front (Brexit, tariffs, trade war), a close eye has to be placed upon supply chain reliability. Where is supply in danger and what can be done to mitigate supplier related risk? In parallel, given constantly shifting conditions, it’s essential to continually ask, “What cost am I willing to pay to meet customer service expectations?”
Dun & Bradstreet tracks supplier criticality in its Global Supply Chain Risk Report. An important element they focus on is understanding the density of buyer-supplier relationships in which a supplier delivers an essential component or service. D&B describes this as Supplier Criticality: the proportion of buyer–supplier relationships where the supplier is considered critical or key by the buyer company. This indicates a company’s perceived degree of dependency on its suppliers.
From late 2017 to early 2018, supplier criticality has increased in the retail industry from 72.4% to 75.2% - the highest of all industries scored by D&B. A greater dependency on suppliers means greater risk. The viability and health of a critical supplier has a direct impact on the retailer’s brand, revenue and customer experience. And given the changes and disruption in retail in recent years from amazon and other emerging startups built around rich new customer services and experiences, supplier criticality and the potential for failure presents a significant challenge.
Reducing risk through digital procurement
Diversifying business across a broader supply base to spread out exposure is not always an option. Changing suppliers brings new challenges and costs, along with new sets of risk. But partnering with existing suppliers can mitigate risk and help assure on-time delivery of quality goods. This starts with collaborating closely with suppliers and essentially eliminating any barriers between buyer and supplier. A purchase order, for example, can be surrounded with noise and side conversations if there are manual processes around the order confirmation, delivery, or settlement process. But if the purchase order and surrounding processes are digitized, traditional conflicts such as discrepancies can be eliminated. In a digital environment, the purchase order is seen and recognized by both parties as “the accepted truth” and any amendments made are plainly visibility to internal and external parties, so that everyone is working from the latest version. This enables more accurate invoices and ASNs and there is no potential for discrepancy because the invoice is created directly from the purchase order. Invoices are approved faster - or automatically. Removing paper or manual processes and digitizing information and documents in a shared environment brings the two organizations closer – and onto the same team. And with this, not only is supplier risk reduced, but suppliers can begin to solve problems and help retailers better serve customers. For example, when that same PO and ASN platform delivers accurate packing, scanning and shipment building information to the factory floor, retailers can rely on that factory to ship direct to store or even direct to consumer. The ability to meet customer demand and have inventory on-time in-full, is actually enhanced by a supplier that’s “on my team” and digitally enabled to work towards servicing the end-customer.
Ensuring a healthy supply chain with supply chain finance
Supplier financial risk is another metric Dun & Bradstreet tracks. D&B defines this as the percentage of buyer–supplier relationships where the supplier has a high or very high financial risk score. Financial risk, like supplier criticality is highest in retail, where it is scored at 23.6%. This number increased by 3% in early 2018. Supplier financial risk has a direct impact on quality of goods and on-time delivery. Many overseas suppliers struggle to obtain capital and are forced to obtain it locally “on the street” in emerging regions, where interest rates are significantly higher. As retailers consider new suppliers outside of China, financial risk becomes a significant concern. A cash strapped supplier puts end-customer expectations at risk, but in addition, expensive capital costs will end up baked into the cost of goods sold, eating away at margins.
Teaming up with suppliers can help tackle financial risk while assuring a healthy supply chain. In the example above where PO and settlement processes are digitized, invoices are auto-approved within a day. If payment terms are 30 days from invoice approval, an approved invoice in one day creates a 29-day window of opportunity for suppliers to obtain supply chain financing.
In a manual world, invoices sometimes take weeks to process and approve. In an automated world, suppliers are paid on time and they have capital they need in just days. They also have cash flow visibility to better plan their operations. And when finance providers can see into that same digital ecosystem, financing delivered to overseas suppliers is based on the credit strength of the retailer – reducing capital costs in the supply chain. In other cases where retailers have excess cash, they take advantage of this digitized environment to fund their own suppliers, without a finance provider, to receive a greater return on their cash opposed to parking it in a money market fund.
Addressing financial risk plays into – and helps mitigate – supplier criticality risk. In a global trade environment that’s growing increasingly volatile by the day, partnering with suppliers through digital enablement and collaboration – on programs such as supply chain finance - is one of the few consistent and reliable wins that pays dividends for both retailers and suppliers.