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Not enough insolvencies now? More supply chain pain to come?.

Risk Management xRiskxRisk MitigationBlog+-

One of the oft-mentioned worries for buyers is the financial health of their suppliers. This is not because of altruistic worrywarts occupying procurement, but a concern for delivery.

 

We have found repeatedly in our research that the unstable economic environment – and its potential to push vulnerable suppliers over the brink – is a leading item on the supply chain risk register.

 

During the financial crisis of 2008 (and its continued depressing effects in Europe and North America) many businesses were disrupted by failed suppliers. Many high-profile businesses went under, attracting considerable media attention.

 

Throughout this storm, however, was a number of economists arguing the reverse: fewer businesses were going bust than we may have expected. Indeed, quickly looking up the UK stats, the totality of registered insolvencies has steadily declined since 2003. Few would argue that the current state of British business has noticeably improved in the last ten years.

 

Many people point at the banks to explain this phenomenon.

 

For banks (apparently ‘too big to fail’) suffer from a bulging loan book with loans with increasingly large businesses. Financial institutions, which have struggled to absorb the impact of changing financial regulations and a growing body of bad loans. The remaining loans, no matter how unproductive, must be protected and maintained to prevent the bank from accruing more write-offs.

 

Instead of enduring a short, sharp correction in the marketplace, we have spread the pain over years, not months. In economic terms, 24-hour bug has become a chronic sickness. This will ultimately affect the structure of the economy with expectations lower investment and employment rates.

 

As interesting as these issues are, the uncertainty of recovery may be hiding further insolvencies. Masked by insecure banks and propped by government subsidy, a large body of the supply chain may be delivering goods on an unsustainable business footing.

 

There is two reasons why buyers would be concerned about this.

 

Firstly, they can expect more businesses to go bust. This may even occur in a large wave once the true valuation of businesses emerges onto the marketplaces. Rolling out financial performance indicators for all suppliers and ensuring that all meet the required financial footing is a must.

 

Secondly, recent events show the dangers of over-extending credit. Although supplier collaboration has become a fashionable topic in recent times, with many companies offering favourable payment conditions and support in return for innovation. Still, buyers must be wary of backing unsound business.

Jonathan Webb
Posted by Jonathan Webb