Identifying Supply Chain Bankrputcy Risk
Imagine the risk to your business and customers if 14% of your supply base defaulted on its debt.
Possible? According to a July 2018 Moody’s study, 14% of companies defaulted on debt in 2009/10. What is the most correlated predictor (83%) of default from their analysis? Debt to pretax operating profit ratio from 2 to 3 quarters earlier.
Of note, a basket of 50 publicly traded automotive tier 1s, that I track, has a similar median ratio value today v. Q1 2010. And, more than 1/3 of the 50 suppliers have Alt Z scores in the distress zone before factoring in Q2 results. Further, Epiq AACER released its July 3rd report showing a 43% increase in commercial chapter 11 filings in June ’20 v. June ’19.
Upon understanding the potential default/bankruptcy risk in their supply chain, here are the paths that most people will follow:
- Do nothing and react if/come.
- Monitor some at-risk/critical suppliers and prepare contingencies.
- Monitor at-risk/critical suppliers and prepare and execute contingencies.
After managing an automotive OEM supply base through the ‘08/09 financial crisis, risk and trouble find companies that follow path 1 (bigger, more expensive, and harder to solve disruptions). Paths 2 or 3 produce better outcomes from a lessons-learned perspective – prepare for the worst and hope for the best.
What is the financial health of your suppliers and the extended supply chain (tier 2/3/4)? How open are you to take a proactive risk mitigation approach when your resources and budgets are constrained? The ROI should be attractive because proactive management should reduce financial losses due to supply chain bankruptcy/interruption by attacking problems when they are smaller and jump-starting the implementation of alternatives/contingencies.
I’m on an experienced Crisis Team with other automotive OEM Purchasing experts, and we developed lessons-learned, proactive tools and resources (such as free webinars, 10 Point Health Checklist, playbooks) to help implement choices 2 or 3, which I am happy to discuss and share approaches if you are interested.
Additionally, we understand the importance of and how to concurrently deliver business plan critical initiatives such as achieving cost reductions, winning new business awards, and future-proofing supply chains.
Just shoot me an email to learn more @ [email protected] or Contact us.
#CreateValueThatMatters
