Spotting supply chain issues early and mitigating risk

Signs of Supply Chain Issues

Recent economic statistics suggest that the UK may avoid the recession previously forecast by economists and feared by so many businesses, battered as they have been first by the pandemic and then the severe disruption from the Ukraine war. Instead, the economy may bump along in a no-growth scenario well into 2024.

Nevertheless, the last thing any business needs right now are problems in their supply chain. How can warning signs of issues in a supply chain be spotted sufficiently early and effective steps to mitigate potential risks be taken?

1. Are you on top of key suppliers’ current financial and commercial position?

Efficient procurement departments will carry out the necessary due diligence on new suppliers before committing to a relationship with them. In addition to analysing the financials, this means looking out for evidence of declining business performance, major restructurings, changing management structures or inconsistencies in the company’s filing history. If their filing history is not up to date, make further enquiries to establish why the accounts and other statutory data have not been filed on time. Late filing is a huge red flag.

Unfortunately, the task of updating this vital background information too often is allowed to fall by the wayside, except perhaps for a few of the most mission critical suppliers. It’s vital to keep up to date on a routine basis, especially given the long lag between the end of a company’s financial year and the Companies House filing deadline for their accounts.

2. Has there been a reduction in communication with a supplier?

One of the biggest warning signs that may suggest that trouble is brewing with a supplier is a reduction in communications from them, whether it is sudden or, more worryingly, it has become prolonged. Poor communication can lead to all kinds of problems in supply chain operations, such as stock shortages, incorrect orders, missed shipping dates and an inability to forecast supply chain costs, but it is also usually one of the first indicators that a supplier has serious problems.

The pandemic has reinforced the need to talk to supply chain partners, so any change in communication can quite rightly be unnerving and can so easily lead to a break down in trust, particularly if there has been a longstanding relationship with a vendor. Keep a close eye on communication patterns and a record of all contact.

3. Are there delays with deliveries?

Material shortages and escalating costs have crippled most sectors in recent years – delivery delays only serve to impact this further. Inconsistent stock levels and deliveries outside of agreed schedules could be another signal that a supplier is in financial distress.

The supply of goods between businesses tends be governed by detailed financial and commercial contract provisions, but deliveries can often be based on looser schedules, often simply incorporating a supplier’s standard terms of sale, which are not necessarily set up to cover long-term supply arrangements, particularly if delays occur. This can leave buyers open to significant operational disruption as well as financial risk.

4. Has the supplier asked for quicker payment?

When a supplier finds themselves in dealing with severe financial pressure and is struggling to manage its cash resources, one of their first and most obvious strategies is to try to drag forward debtor receipts by accelerating payment terms or even requesting cash upfront for supplies.

This will have a knock-on effect on the buyers’ own cashflow but sometimes the urgency of preserving supply arrangements makes agreeing to tighter payment terms tempting. Before doing so, it is worth exploring with the supplier whether there are other ways to support them, such as committing to longer-term contracts or increasing future purchase commitments