Your Procurement Department Needs Credit Data, Too

Where is the risk in your business?

Credit managers know that credit reports are one of their most useful tools for managing risk. Ongoing monitoring of customers’ credit reports provides valuable data for deciding which customers are your best bets for prompt payments and ongoing sales.

But risk doesn’t come just from the customer side of the business. Supply chain risk management is a full-time job in most organizations. Procurement managers must work closely with supply chain managers to prevent disruptions and ensure they manage supplier spend wisely. To do this, they perform regular supplier evaluations.

What do you learn from supplier evaluation?

Supplier evaluation can be an in-depth process involving several layers of metrics, including how reliable the supplier is (on-time deliveries), quality of the items supplied, responsiveness, compliance with internal and external regulations, and so forth.

However, procurement managers also need to evaluate the stability of the supplier’s company overall. How likely is it that a supplier’s company will stay in business? Is the supplier thriving or just scraping by? Does the supplier have good relationships with its sources — thus ensuring it can fulfill the orders you place?

The answers to these kinds of questions can help procurement managers determine whether the supply chain is solid — or at risk of disruption.

Where does financial stability data come from?

Fortunately, procurement managers can obtain the objective financial data they need through commercial credit reports.

For a summary of supplier company health, procurement managers will want to create a snapshot of financial health by looking at factors¹ such as the supplier’s:

• Profitability
• Ability to manage short-term obligations
• Payments to other partners
• Creditworthiness
• Overall health compared to others in the industry

By monitoring suppliers’ financial stability over time, procurement managers can see which suppliers are consistently healthy, identify red flags before issues arise in the supply chain, and find suppliers they may want to add to their supplier pool.

The value of credit reports and proactive credit portfolio management extends far beyond the accounts receivable department. Credit management can help manage risk at every level of your organization.

¹ Bierman, Libby. 2012. “5 Ways to Evaluate a Supplier.” My Purchasing Center, November 21. http://www.mypurchasingcenter.com/electronics/articles/five-ways-to-evaluate-a-supplier