Credit departments have long performed the important role of assessing and monitoring the health of new and existing customer accounts. However, in the wake of the Great Recession and the ensuing slow economic recovery, the need to evaluate the health of supply chain partners has become even more important.
In my role here at Experian, I talk to people every day in credit and supply chain management, and I’ve found striking similarities in the roles of both groups. First, each group has an interest in understanding risk when establishing new relationships, whether it be assessing the credit risk of a new customer or determining the financial stability of a critical vendor. Second, both have a shared interest in monitoring the financial health of both customers and vendors (although it could be argued that the potential disruption associated with the loss of a key vendor might carry a much higher impact for a supply chain manager than having to collect on or even charge off a customer account would for someone in credit management.) For example, a major battery supplier for one of the leading electronic vehicle manufacturers ran into financial trouble recently, and it caused all kinds of headaches. The stock price , sales and customers all suffered. The battery company was the sole supplier to this vehicle manufacturer. With proactive credit monitoring, the vehicle manufacturer may have been able to spot signs that the vendor’s financial stability was beginning to deteriorate, and the headaches could’ve been avoided. Thankfully things worked out in the end (the vehicle manufacturer went into the battery production business.)
All in the family
Business family relationships are also important in credit and supply chain management. Credit professionals would be interested in Corporate Linkage because they really want to know how to manage a particular customer. Understanding if an account is a subsidiary of a parent company that they have an existing relationship with is vital, as it can affect potential opportunities or responsive strategies if they are delinquent. These insights can help make a more informed decision. For example, a credit manager may think twice about aggressively pursuing an account that may even be moderately delinquent if they realize that they also have a sizable relationship with the account’s parent company. By contrast, they might take a firmer approach with a smaller customer who is behind on their payments, but represents a significantly smaller overall spend.
On the supply chain side, visibility into the structure of a parent company is also important, because if the parent company runs into financial trouble it’s likely to cause a domino effect that could quickly steamroll into a supply chain crisis. Understanding and monitoring a supplier’s corporate family relationships enables managers to ensure that they truly have adequate supply chain redundancy. As much as Corporate Linkage informs relationship management in credit accounts, it can help the supply chain manager understand how their spend contributes to the suppliers bottom line, creating additional opportunities for spend management. A supply chain manager that knows they are doing business with three subsidiaries of the same company puts them into a much stronger negotiating position when it comes to volume discounts than if they were viewing the businesses as separate suppliers.
Industry Groups Focusing Attention
One example of an organization paying attention to the converging credit and supply chain management methodologies is Burbank, California-based Credit Management Association, who recently established a Supplier Risk Management Group.
Group Facilitator Larry Convoy agrees that credit management is critical to the health of the supply chain saying recently “During my time in credit management, I’ve often heard the following: ‘We can survive if a customer relationship goes bad, but we cannot survive if one of our primary or secondary vendors has an interruption in delivering product, raw materials or services to us.’ For that reason, we invest an equal amount of resources investigating our vendors. We’ve created an industry credit group based around this idea for our members, as these relationships can make or break their businesses.”
Reducing Friction, Increasing Efficiency
To take it a step further, credit professionals and supply chain managers are focused on reducing cost and friction, while increasing efficiencies.
A client recently said that it takes 15 minutes for an analyst to review the paperwork they require of a new account that does not pass automated vetting, but on average it takes 10 days for the analyst to get the required documentation from the applicant. In some cases, businesses are limited to working with suppliers that are located within their geographical area for logistical reasons. These companies walk a fine line between operational efficiencies and assuming the right amount of risk. If the risk assessment process is too intrusive, the supplier may walk away. Asking for additional information and delays in establishing the account may put a strain on the relationship at the outset, so using third-party data sources in the risk assessment process can help enhance efficiencies and reduce exposure while maintaining a positive supplier relationship.
Delinquency vs. Default
One difference between credit management and supply chain is that credit departments are typically concerned with predicting customer delinquency and cash flow, while supply chain management tends to be more focused on assessing the risk of supplier default. However, if a supplier plays a critical role in the supply chain, or is not easily replaced, monitoring the supplier’s financial health is vital. It may be the difference between having to shore up a key supplier financially if there begins to be signs of increasingly delinquent payment versus having the supply chain come to a screeching halt if the supplier suddenly fails.
Risk Management Trends
Many credit management professionals in financial institutions used macro-economic data during the Great Recession to identify potential regional credit trends that could impact the health of their portfolios. This approach may also be valuable to supply chain managers who want to keep regional economic downturns from disrupting their supply chain. It’s smart to assess not just the supplier’s credit, but also how regional credit trends in the supplier’s area may impact the supplier’s financial health. For example, according to Experian , four of the top five metro areas for bankruptcies in the transportation industry are in California. If a company relies heavily on a transportation company in California and that supplier is somewhat dependent on their local market for their ongoing financial wellbeing, it might be wise to have additional transportation suppliers who can provide similar services, but who are headquartered in less economically volatile areas of the country.
At the end of the day, there are far more commonalities than differences between credit and supply chain management. Utilizing proven credit risk management tools, and the data that powers them can help reduce weak links in the supply chain and help steer clear of unpleasant surprises.
To learn more about Experian risk management solutions contact us at https://www.experian.com/b2b or call 877 565 8153.
