Supplier Audit Vendor Service

With each passing day, the global economy sinks further into recession as the contagion which started in the lending market spreads into mainstream sectors.  Newspaper headlines are littered with examples of businesses in every industry from automotive dealerships to fast food franchises which are at risk of insolvency due to credit challenges.

Unfortunately, supplier failures related to financial distress are becoming all too common even for the largest of companies.  It might seem obvious, particularly in today’s macroeconomic climate, to evaluate the financial strength of one’s supplier community.  However, historically supplier financial evaluation has not been a priority for most large buying organizations such as retailers and manufacturers.  Instead, supplier selection is typically led by the sourcing or procurement organization of a company.  Sourcing teams focus on product-specific factors such as price, quality and performance to specifications.  Vendor evaluations may also include the evaluation of sustainability policies or audits to ensure compliance with child labor laws.  Inputs for the RFPs sent to suppliers are typically generated from a cross-functional team consisting of product management (or merchandising), supply chain management and transportation management personnel.  There is surprisingly little due diligence done on a supplier’s financial health in sourcing processes.  Historically, finance functions have historically been viewed as more tactical than strategic in the supply chain.  Finance is engaged for individual order transactions to negotiate letters of credit, process inbound invoices and originate supplier payments, but not in supplier selection processes.

Guidelines for Supplier Selection

It is important that effective processes for selecting suppliers be in place.

Typically, the selection process starts with the development of a complete specification and ends with the best suppliers being selected to provide the necessary requirements so that the organization receives the value it is paying for.

When organizations do not demand the best and are willing to accept mediocre or slightly above average supplier performance, the supplier base will not be challenged to improve, thus reducing their overall competitiveness.

To know one’s supplier’s financial position, sourcing organizations should team with their finance groups to conduct diligence on each vendor’s profile.  Questions asked might include:

What is the debt position of the supplier?  What constitutes a breach of covenants that could impair supply chain activities?

What are the cash flow cycles of the supplier?  How significantly are they impacted by one’s payment terms?

What are the other customers of the vendor?  What percentage of their revenue is tied to the largest customer(s)?