Supply chain risk remains despite global recovery
Supply chain risk remains prominent for Australian firms despite evidence that a global economic recovery is underway.
Research conducted by Dun & Bradstreet (D&B) reveals a somewhat gloomy risk outlook for major suppliers, with a large number of them exposed to the fortunes of related parties based in some of the economies hit hardest by the global credit crisis.
The research – which was conducted on more than 24,000 of Australia’s leading suppliers – reveals that nearly 7,000 of the organisations examined were part of a broader group of companies and of the 5,700 ultimate parents around 2,000 were domiciled in another country. Nearly 1,500 of those 2,000 foreign domiciled companies are based in economies that have experienced some of the greatest distress from the global economic slowdown.
The United States, which featured heavily among parent companies, has been at the centre of the global crisis and as a result, its country rating has been downgraded multiple times over the past two years. Further highlighting the extent of the credit crisis’ impact around the globe, 45 of the 132 countries assessed had their rating downgraded during this period, with 16 countries having their rating downgraded more than once or by more than one quartile. D&B’s country ratings are based on an assessment of economic, commercial, external and political risk.
Of the ultimate parent companies examined in the study, three per cent are classified as being in financial distress and a further eight per cent are categorised as a high risk of experiencing financial distress or failure in the months ahead.
According to Christine Christian, D&B’s CEO, the varying impacts of the global financial crisis on countries around the world demonstrate the importance of procurement teams developing a complete understanding of local and global risk and of the need to stay on top of a constantly changing environment.
“Too often risk analysis is conducted at the stage of appointing a supplier but ongoing monitoring is ignored,” said Ms Christian. “This means that purchasers aren’t always aware of how changing economic circumstances are affecting their suppliers and ultimately their own risk exposure. Risk doesn’t just derive from the status of the individual supplier but may be affected by their relationships with affiliates and the ultimate parent company.
“When the ultimate parent resides overseas in countries that are, or have recently experienced considerable economic stress, the need to understand total exposure is even more important. There are numerous examples of well run organisations in Australia that end up failing because of events related to their parent company.”
Over the last eighteen months a number of high profile suppliers have failed, leaving their clients without core business services such as information and communications technology. Commander Communications Limited, one of the 2008 casualties, was categorised by Dun & Bradstreet as a very high risk of failure five months prior to it entering receivership.
The fallout resulting from Commander’s collapse was extensive, with the private sector and the Federal Government impacted. The Finance and Deregulation; Environment, Water, Heritage and the Arts; and Agriculture, Fisheries and Forestry departments were left in disarray as they attempted to ensure the department’s IT systems could continue to function properly. Commander had also been relied upon to assist the Department of Parliamentary Services to maintain computers used by members of parliament and their staff.
D&B’s supplier research reveals that the worst may not be behind Australia’s suppliers, with risk expected to remain prominent in the months ahead. Younger suppliers are categorised as a higher risk of experiencing financial distress in the coming twelve months than older companies (established for longer than 50 years).
In addition, an industry examination reveals that suppliers in the transport sector are at the greatest risk of financial distress with 14 per cent rated between a very high to severe risk. The construction industry was also categorised as a significant risk, with more than 12 per cent of firms assigned high risk ratings.
The supply risk research follows another D&B study that demonstrates that firms are particularly susceptible to risk during an economic recovery. In the financial year that followed the Dot Com Bust of 2000, Australia experienced a 20.5 per cent increase in bankruptcies, despite positive economic growth being recorded. This was followed by a further increase in bankruptcies in the 2002 financial year, and it was not until year three of the recovery that failures began to decline.
Ms Christian believes it is critically important that procurement professionals understand the full extent of their supply chain risk, no matter what the economic environment.
“It is evident that Australian firms will continue to face challenges as the economic recovery unfolds,” said Ms Christian. “In this environment, survival and prosperity are dependent on firms maintaining a strong focus on effective risk and cost management. Therefore, it is not enough to simply source suppliers when they are required and only conduct an appropriate risk investigation at the outset of a relationship.
“Businesses need to ensure they understand the total picture and monitor their suppliers on an ongoing basis. Circumstances can shift almost overnight having potentially severe detrimental impacts on a business."