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Dig Deeper: Extending Credit Risk Management to the Customer’s Supply Chain

Every business is vulnerable to risk as a result of its supply chain — from the companies it works with to the products and services it relies on and produces. So when your credit department is considering extending credit to a business, it’s important to dig deeper than just a credit-risk analysis — you also must consider the health and history of the companies, products, and services along its supply chain.

What is the supply chain?

A company’s supply chain is the network of all the people, companies, resources, activities, and technology involved in the planning, production, sale, and delivery of a product. It begins with market analysis, planning, and designing a product and ends with customer satisfaction. Effective supply chain management consists of the following stages:

  • Research and development
  • Materials sourcing
  • Production
  • Sales and distribution
  • Customer service (e.g., answering questions, accepting returns)

The stages rely on one another, forming links to a chain. When there is a disruption at any stage of the process, the effects can trickle down and disrupt the entire supply chain. That’s why good supply chain management is crucial. It requires careful planning of manufacturing processes, researching and choosing the right suppliers of raw materials or product components, and monitoring materials and products in inventory to avoid disruptions within the supply chain and sustained inventory.

Understanding the risks of the borrower’s supply chain

Due to the nature of the interconnected supply chain, lenders must take a holistic approach to evaluating businesses, including understanding business operations, any partners, as well as business and supply chain history. A failure in the supply chain can affect the company’s ability to repay a loan. For that reason, credit managers must review the credit history of the borrower, as well as the entire supply chain and manufacturing process.

Often, companies are so focused on procuring materials and products at the lowest cost and complying with numerous regulatory issues that they fail to carefully analyze the credit risk of the components of the supply chain. Risk in the supply chain can actually pose a greater threat than focusing on reducing procurement and manufacturing costs. When a link in the chain fails to deliver products on time, the entire manufacturing process can be disrupted or shut down, causing significant financial losses and damage to the company’s reputation.

Reducing the risk

When a supplier or other business considers extending credit to a company that wishes to purchase its products and services, its credit department performs a credit-risk analysis. This analysis compares the benefits of the transaction to the potential for loss due to the customer’s inability to fulfill the terms of the repayment agreement. A credit-risk analysis looks at the borrower’s credit rating, payment history, defaults or bankruptcies, and its operations and business practices.

The company requesting credit relies on other businesses — including suppliers, developers, or distributors — to carry out business functions. However, when one of those entities fails to provide the product or service as expected, it can have a serious effect on the borrower’s ability to conduct business and their ability to repay debts. So, to further reduce a lender’s credit risk, it’s important to analyze the indirect credit risk of all the businesses in the borrower’s supply chain.

Monitoring supply chain risk is complex and time-intensive; that’s why partnering with a reputable credit management company like MSCCM can be the perfect solution. We provide the knowledge and resources you need to analyze and monitor your supply chain relationships, so the trickle-down effect doesn’t significantly affect your bottom line.

Need help managing your commercial credit risk? MSCCM financial experts can assist you. Contact us today.