End-to-end supplier due diligence is the foundation of resilient supply chains. The process (from selection to segmentation and management) involves carefully evaluating and selecting suppliers based on their ability to fulfill your business needs.
The world’s largest companies, from Apple to Nvidia, perform due diligence to ensure they align with the strongest suppliers. But with many supplier risk areas to assess—from quality and assurance to cyber readiness and ESG adherence—how can organizations streamline the process and detect when risk accurately? By focusing on supplier financial health.
Financial health assessments underpin all risk areas. A supplier facing financial challenges compromises quality, cybersecurity, and regulatory compliance. These issues trickle through the supply chain, impact your operations and damage your credibility.
Organizations can protect themselves by incorporating financial assessments, such as financial health ratings. Financial health ratings, or FHR’s, analyze the financial statements of a supplier and assess their operational resilience and risk of default and disruption. They give businesses the insights and expertise to determine whether a supplier is a strong partner in the long-term or is likely to let them down.
Baking financial health assessment into due diligence process has multiple benefits:
- Stronger risk mitigation: A supplier's financial health tells you more about their core strength and operational ability to respond to the many external and internal pressures businesses come under.
- Regulatory compliancy: All supply chains are subject to numerous regulations including labor laws, esg, quality and safety standards. Suppliers with insufficient means struggle to uphold regulatory requirements exposing your business to risk of penalties.
- Transparency: Visibility into a supplier’s financial statements fosters greater levels of trust and strengthens the relationship.
- Consistency: Sustained quality across batches of materials and components if reliant on the financial health of the supplier and their ability to purchase adequate raw materials.
- Cost efficiency: These measures combine to reduce the risk of defects, recalls, late deliveries, production disruption and the need to back-fill orders or replace a supplier at short notice. These failures are avoidable costs.
While initial due diligence is essential, it is equally important to maintain ongoing financial oversight of your suppliers. A supplier that was financially sound during the onboarding process might encounter challenges later, especially given today’s economic factors of persistent inflation and high interest rates. Implementing regular financial health assessments (recommended twice-yearly reviews) helps ensure that your partners remain stable and reliable.
By consistently monitoring your suppliers' financial performance, you can ensure that risk is mitigated, operations are streamlined, and costs stay down by keeping disruption at bay.
In today’s volatile market, end-to-end due diligence is no longer a nice-to-have, it’s a necessity. By implementing financial health assessments into due diligence processes, you can protect your business from a wide range of supplier risks and strengthen your operation.
