Numbers tell a story. Adding financial risk assessment to the analyses that supply management practitioners do each day can be beneficial and proactive. While help
from an expert may be required for financial risk assessment,
it can help supply management protect an organization.
Supplier financial assessment should begin during the
negotiations phase of supplier sourcing. This will allow the
team to identify and address risks or remove risky suppliers
before making a final decision on contracting. Additionally,
supplier relationship managers should assess supplier
financial health at least annually.
THE DATA TOOLBOX
Data needed to perform financial analysis on a supplier is
available for any public company. For a private company,
request the financial data early in the sourcing process and be
willing to sign a confidentiality agreement. Annual updates can
also be requested by contract.
Collect the past three years’ worth of the following:
Balance sheets. These indicate the physical health of the
company. Assets indicate the resources available to the
company to fund current and future operations and growth.
Liabilities indicate current and future claims on the resources of
the business. A high level of liabilities relative to assets can be a
Using a “data toolbox” can help
procurement teams be proactive in
protecting their companies.
ISM Mastery Model®
Core Competency: Financial Analysis
BY JAMES T. PEARSON, MPP, CDPM