Supply chains are the backbone of many industries and businesses. Every part, from raw materials to operational technology, must arrive on time and meet the exact specifications to keep production running smoothly. When supply chain disruption strikes, the impacts are devastating. In 2021, during the height of post-COVID supply chain disruptions, the average cost of supply chain disruptions for an organization was $228 million according to Statista.
Factors such as persistent inflation and high interest rates mean that supply chain risks are still alive and well today. According to Deloitte, the leading cause of supply chain issues in Central Europe was higher prices for commodities. This is because the majority of suppliers are private companies with finite resources, so, when inflationary pressures hit, their cash reserves are squeezed and they become less resilient against unforeseen disruption.
In today’s economic landscape, how can companies gauge risk levels across their entire supply chain? Through financial health monitoring.
By analyzing the financial statements of their suppliers, organizations understand whether their suppliers have the resources to withstand unexpected challenges. And they can take proactive steps to mitigate risk. At a broader level, companies can observe risk in portfolios or categories of suppliers and detect risk concentrations effectively.
RapidRatings analysis of supplier financials across four key sectors in manufacturing shows where risk is heavily concentrated:
- Automotive: The bulk of the automotive supply chain is Transportation Equipment Manufacturing, making up about 18% of the supply chain. However, RapidRatings data shows that 30% of suppliers in this sector are high risk or very high risk.
- Healthcare and Pharma: One of the most critical supplier sectors to the pharma and healthcare industries is Scientific Research and Development Services, as it drives and innovation and development in drugs and devices. Concerningly, 24% of these suppliers are at high risk or very high risk based on their ability to withstand financial pressure and other challenges.
- Aerospace and Defense: Aerospace Product and Parts Manufacturing is a vital segment in the aerospace and defense supply chain, yet 36% of suppliers have a high or very high risk of defaulting – representing a substantial level of exposure to disruption.
- Technology: Close to 20% of the semiconductor and other electronic component manufacturing sector are high or very high risk based on analysis of their financial health.
By implementing comprehensive financial health monitoring, organizations can identify high risk suppliers and manage their exposure to disruption risk. RapidRatings’ FHR is a financial health assessment that provides ratings on private and public suppliers using financial statements, giving companies a comprehensive view of risk levels across their entire supply chain
Understanding supplier’s financial health is not solely about avoiding or reducing exposure to risk, but about building strategic partnerships. Financial assessments allow you to partner with strong suppliers, increase longer-term commitments, and create mutual growth opportunities.
In today's volatile economic climate, supply chain disruption is a constant threat. By prioritizing financial health monitoring and building robust supplier relationships, businesses can significantly reduce their exposure to risk and gain a competitive advantage.
