Companies must develop their own credit scoring capabilities to prevent supplier defaults from jeopardizing their supply chains, according to a new report conducted by Oliver Wyman in collaboration with the Association for Financial Professionals (AFP).
The New Weakest Link in Your Supply Chain: Supplier Credit, a report presented at a recent AFP conference in San Antonio, says companies can no longer rely solely on credit ratings from credit rating agencies to evaluate their suppliers' financial vulnerabilities.
"Companies need to develop their own capability to monitor the variables that could cause their key suppliers to default," says Hans-Kristian Bryn, a Partner in Oliver Wyman's Corporate Risk consulting practice and a co-author of the report.
"By rationalizing their supply chains during the recession, many companies have inadvertently become more reliant on fewer suppliers at exactly the moment when their own finances have become weaker," says Michael J. Denton, a Partner in Oliver Wyman's Corporate Risk consulting practice and a co-author.
The new report:
- Describes how suppliers' financial vulnerabilities have become major risks to companies' supply chains
- Encourages CFOs and treasurers to pay as much attention to evaluating the probability of supplier default as they do to potential disruptions in their suppliers' operations
- Points out that suppliers are not rated by credit rating agencies if they are located in lower-cost countries where financial data is often less available and unreliable
- Argues that companies which behave more like their own credit rating agencies will have a competitive advantage over rivals who lack this level of sophistication
See the study here.