Time to check supplier relationships
The high-profile collapse of Carillion is a timely reminder that financial failure can affect businesses in all sorts of ways. The ‘domino effect’, where the collapse of one company pulls down others, is a real phenomenon. Some businesses concentrate all of their risk management on the creditworthiness of their customers and fail to appreciate the potential impact of supply chain failure.
The management of supplier relationships is a vital strategy for any business and particularly those with key suppliers. Suppliers who are mission-critical or who can cause significant business disruption should be managed carefully and the potential risks assessed. Key supplier relationships should be seen and managed as a critical business partnership driven by value rather than by price.
These relationships should be carefully thought through to consider all the potential risks, even for relatively small businesses. There are so many factors which can be impacted by the failure of supplier relationships.
Areas to consider include:
- Data – this is a hot topic for all businesses with the introduction of GDPR in May 2018. For businesses which share data in any way, contingency plans should be in place in the event of the failure of one of the parties. An obvious example is information which your business may hold ‘in the cloud’: what are the rights and obligations of each party if your IT provider was to fail?
- Traceability – many business sectors now require traceability for products which are sold on. In the event of the failure of a key supplier, would the traceability of your products be interrupted and what impact would this have on your business?
- Creditworthiness – are your key suppliers in good financial health and do they themselves have a reliable supply chain? You do not want your business to be impacted by delays on the part of your supplier.
Before entering into a supplier relationship, a risk assessment should be carried out on key areas:
- Financial health is an obvious area and many different credit reports are available to help with this assessment. Kreston Reeves offers the internet-based business information and reference service CoCredo which allows you to gain that critical advantage of knowing who you are dealing with at the touch of a button (click here or phone 01494 790608 to find out more).
- It is perfectly reasonable to ask a supplier to provide references and to speak directly to other customers about the service they receive.
- It is also sensible to visit a supplier’s premises and to provide them with a series of questions regarding their systems, their own supply chain and the reliance on key people or funding.
Even when a supplier relationship is going well, regular assessments of your supply chain should be undertaken. Key risk areas should be discussed with the supplier. This should help to create an atmosphere of partnership rather than a bland supplier / customer relationship.
If you start getting concerned that a supplier to your business is looking unstable, consider your options at an early stage. You may start getting the sense that service levels are dropping; there could be delays in supply, turnover of staff at the supply company may be increasing or the quality of the goods or services provided may be falling.
Take these indicators seriously and, whilst you will want to address these issues, also consider what contingency measures you could put into place to protect your business if the worst were to happen. It is worth considering the contractual obligations of both parties as well as the practical issues.
This is an area where discussing any concerns with a trusted adviser who can challenge your thinking and decision-making is particularly valuable.
To discuss the above further please speak with your usual Kreston Reeves adviser here or Andrew Tate, Partner and Head of Restructuring here or on +44 (0)330 124 1399.
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