Overcoming supply chain challenges: credit management & risk analysis

In times of global tension, supply chains and networks are coming increasingly into focus. Changes to transport routes and even transport blockades are leading to massive price rises for certain goods, and in some cases even a complete breakdown in deliveries. Similarly, customs duties can result in significant price increases. Weather and environmental events can also lead to delivery problems.

In such situations, customers ask themselves whether there are alternative suppliers. If a supplier fails to deliver, in extreme cases the company’s own production may also come to a standstill, with significant economic consequences. If the supplier’s prices rise, it must be assessed whether the company is in a position to pass on these price increases. Otherwise, one’s own margins will shrink. If fixed purchase prices have been agreed with the supplier, such that the supplier must bear the higher costs, it must be assessed whether the supplier can absorb the cost increases or whether this will lead to liquidity problems, potentially resulting in insolvency and withdrawal from the market. If this involves single sourcing, you face the challenge of finding a replacement quickly and, as a customer, suffer massive losses yourself. There are examples where buyers have taken over their suppliers in such situations to avoid suffering even greater losses themselves.

This means that the financial stability of suppliers is just as important as that of customers. Assessments of suppliers in this regard should therefore also form part of the standard repertoire of audit processes. This is a task for credit management.

Similarly, political risks must be taken into account due to the location of suppliers. Credit management should also be familiar with this.

Finally, the stability of the transport chains used must be assessed. Should problems arise here, alternatives should already have been simulated that can be utilised if necessary.

In the current situation, two further measures are currently being taken by companies. Firstly, individual companies are reallocating their suppliers. Offshoring is giving way to nearshoring in order to shorten transport chains. Furthermore, it is evident that, in the case of single sourcing, the risks involved in the supply chain are being critically scrutinised. Here, companies are assessing whether at least a second supplier – one that is, however, differently positioned in terms of political dependencies and transport routes – should be considered. This cannot, however, simply be a ‘standby’ option that is only called upon if the other supplier fails. This may then require, for example, breakdowns based on supply quotas. Naturally, these measures can also increase a company’s own costs. It is a matter of weighing up the options. It may even be necessary to extend such assessments beyond one’s own suppliers (Tier 1) to cover the entire supply chain, if one wishes to avoid surprises, thereby also influencing the suppliers of the suppliers.

In such a situation, credit management is also called upon to use its existing expertise not only to assess the customer side, but also to carry out a similar assessment on the supplier side. By combining this with further information along the supply chains, a risk assessment can be carried out as a preventive measure and risk-mitigating measures can be initiated.