Sitting at the forefront of helping manufacturers mitigate supplier risk, we have a unique vantage point that gives us direct insight into leading supplier risk management practices.
Here are top three strategies manufacturing leaders are leveraging today:
1. Leaning back into Lean Manufacturing
Pandemic disruptions like material shortages and transportation woes forced many manufacturers into a "Just-in-Case" mentality. Stockpiling became the norm, prioritizing building buffers against unpredictable demand spikes. But this approach comes at a cost. Just-in-Case often leads to overproduction and bloated overhead, translating to higher costs.
Recently, many leading manufacturers are shifting back towards lean manufacturing, a philosophy focused on maximizing efficiency. Global corporations are increasingly drawn to lean principles: reducing costs, eliminating wasteful processes, and boosting productivity. Resources previously tied up in early production can now be redeployed towards quality control, research and innovation.
But lean can only function with reliable and resilient suppliers. Here's where financial health monitoring through the FHR comes in. Imagine the FHR as a crystal ball, allowing companies to predict future performance and establish stable partnerships based on a supplier's financial standing.
2. Ensuring Quality and Delivery Through Financial Health Monitoring
Financially healthy suppliers can bounce back or tread through unforeseen events without interruption. Consider the current economic climate: the Federal Reserve's interest rate hikes for the past 18 months aim to combat inflation. With high interest rates, many businesses are having to dole out cash to cover rising capital costs. Companies that have strong financial health can withstand fluctuating costs while maintaining operations and outputs.
RapidRatings data shows that companies with weak financial health are 2.0x more likely to have issues with quality and 2.6x more likely to have issues with delivery. Both of which can lead to costly disruptions to their customers’ operations.
3. Measuring Financial Risk to Understand All Risk Domains
Financial health goes beyond ensuring suppliers can cover operating costs. It acts as the foundation for managing all other risk areas. Traditionally, financial risk was seen as one of many risk areas to evaluate. However, this siloed approach left gaps that led to missed critical warning signs. Companies with poor or declining financial health are less resilient, which translates to outages, compromised standards, and costly disruptions for your business.
Understanding your vendors' financial health provides a clear indication of their ability to handle all risks – including ESG, cyber, quality, safety, R&D, and more. Companies with good financial health can withstand price and capital fluctuations, manage regulatory requirements, and maintain standards. Those with poor financial health lack the resilience to navigate these challenges.
By implementing these strategies, manufacturers can build a robust and resilient supply chain, prepared to face any disruption that comes their way.
