This issue's key takeaways:
- A financially unstable supplier may disrupt a supply chain long before bankruptcy is even considered
- One vulnerable supplier can cause serious repercussions for companies throughout a supply chain’s ecosystem
- Companies that perform proactive and continuous analysis of its their suppliers’ financial health will detect issues earlier and mitigate the damage more effectively
- Moreover, the companies that do this well will be much better positioned to grow with their suppliers, having mitigated risk but created the most resilient supply chain possible
Risk trivia:
The word tariff derives from what language?
(Look in the Stat of the Month section for answer)
Snapshot: A step-by-step review of how a financially weak supplier affects a (hypothetical) supply chain
By James H. Gellert, Executive Chair, RapidRatings
A common misconception of supply chain disruption is that a supplier suddenly declares bankruptcy and only then is a shocking web of financial instability fully exposed.
In reality, a supplier’s poor financial condition can create serious issues long before a dramatic, and rare, declaration of bankruptcy, and impact supply chain performance in numerous ways that could have been detected and mitigated. Critically, this condition can almost always be identified early and with enough warning to mitigate the risks and often help the at-risk supplier.
Let’s take a look at the domino effect a distressed supplier has on a supply chain, homing in on warning signs to be aware of and the wider implications of a faltering supplier.
The supply chain reaction
Let’s use the example of an automotive supply chain, and high five to anyone who can recognize the shared trait for the companies.
Warning: For the sake of time I will oversimplify this incredibly complex example with gusto and I humbly ask you to accept the oversimplification with an open mind. Thank you.
Here’s are the main components and companies in our theoretical automotive supply chain:
- Dealerships: A business that sells vehicles directly to consumers, often from a physical location. Often annoying to deal with, always always selling….
- Dealer: Helly by Eagan Auto Group
- Manufacturers: Also referred to as Original Equipment Manufacturers (OEMs), these are familiar names like Ford, Toyota, and BMW.
- Manufacturer: Helly R. Motors Corp.
- Tier 1 supplier: Companies that supply systems and parts directly to OEMs.
- Tier 1 supplier: ScoutTech
- Tier 2 supplier: Businesses that provide crucial parts and supplies for the components produced by Tier 1 suppliers.
- Tier 2 supplier: Casey Safety Systems
- Tier 3 suppliers: Suppliers of raw materials like plastics, metals, and rubber needed by Tier 2 suppliers.
- Tier 3 supplier: Milchick Metals
- Cheaper Tier 3 supplier: Cobel Alloys
Stage 1: Early financial strain
Casey Safety Systems, a Tier 2 supplier, makes inflator components used in vehicle airbags, a small but crucial part of a safety feature found in every vehicle. Faced with a dwindling cash flow, they lay off staff to cut costs while simultaneously working to get an advance payment from ScoutTech, a Tier 1 supplier who buys their inflator components.
They continue to build and deliver on time but with fewer staff and a renegotiated payment contract they have reduced both their output capacity and their margin for error.
Stage 2: Service begins to suffer
To make good on their payments, Casey Safety Systems adjusts their production schedule to speed up turnaround time. However, the loss of staff and ramped up schedule create service and quality issues that begin to affect the supply chain.
ScoutTech is increasingly frustrated with missed deliveries and sporadic communication; at the same time Milchick Metals is growing impatient awaiting payment for the shipment of stainless steel parts which Casey Safety needs to build the airbag inflators.
The rushed production cycle results in an increase in defects, forcing ScoutTech to return inventory which was already overdue. Casey Safety manages to pay Milchick Metals for the stainless steel but is actively looking for cheaper alternatives and additional financing to stabilize operations.
Stage 3: Production delays and disarray
Squeezed by declining revenue, ballooning credit concerns, and growing internal instability, Casey Safety Systems production grows increasingly inconsistent.
A new Tier 3 supplier, Cobel Alloys, is procured at a lower cost, but their first shipment won’t arrive until it’s too late to meet upcoming deadlines. Cheaper material means poorer quality. Production is delayed, and in an effort to fill as many outstanding orders as possible Casey Safety does a hasty reorganization of all in-stock inventory that only adds to the overall confusion and disorder.
ScoutTech has been forced to slow down production, delaying delivery of finished airbags to Helly R. Motors, themselves under pressure from Helly by Eagan Auto Group, and many dealerships around the country, who’s awaiting delivery of new vehicles that have already been purchased. Weary of missed deadlines, inconsistent quality, and reputational damage with Helly R. Motors, ScoutTech scrambles to find an alternative source for inflator components, a time and labor-intensive task.
Both Milchick Metals and Cobel Alloys have been negatively impacted by late payments which have created short-term cash problems.
The entire supply chain is affected.
Stage 4: Emergency measures in search of stability
Casey Safety implements a variety of measures to raise revenue, cut costs, and improve efficiency in an effort to regain operational stability and restore the company’s reputation.
However, attempts to negotiate “buy forward” terms from ScoutTech are unsuccessful, as are initiatives to raise new capital. Creditors aren’t willing to offer additional financing.
The operating budget has been slashed and more personnel has been let go, making it difficult to realize any meaningful improvements to operational efficiency.
Potential Tier 1 partners will only agree to contracts with harsh terms and Tier 3 suppliers won’t extend credit and now demand upfront payment before making any further shipments.
Stage 5: The supplier has no supply
By this point the supply chain has been stressed at every level by late deliveries, missed payments, delayed production, increased costs, tighter margins, and a lot of frustrated customers and clients.
Lacking a financial lifeline and unable to sustain production at a level necessary to regain supplier trust, Casey Safety Systems must now consider the extreme option of bankruptcy.
What can companies do?
Companies can protect themselves, and their supply chain, by taking a proactive approach to monitoring their supplier’s financial condition.
Organizations that use financial health analytics gain a deeper, more detailed perspective into the financial stability of current and potential suppliers. This helps companies detect and manage issues with current suppliers and avoid high-risk partnerships entirely.
Without supplier financial transparency, the productivity of a supply chain can suffer. Don’t let that happen.
Share Your Knowledge! Take our Annual Risk Survey to share your insights and experiences of supplier risk and disruption this year. Respondents get exclusive early access to RapidRatings’ 2026 Risk Report, packed with expert commentary, supplier insights and industry benchmarks.
Stat of the month: 89.6 million
That’s the number of new vehicles expected to be purchased globally in 2025, according to S&P Global. That’s not indicative of tremendous growth, but it’s a lot of vehicles being produced by a lot of supply chains.
Trivia Answer:
The word tariff has travelled a long way and through several languages including French, Italian, and Persian.
But its origin can be traced to the Arabic word “ta’rif”, used to describe “inventory” or “notification”.
So now you know.
If you’re curious about how RapidRatings offers the most accurate and comprehensive financial data analytics in the industry, check out RapidRatings.com to learn more.
