Why Credit Risk Can’t Be Ignored in Supply Chain Management


Supply chain disruption is one of the biggest challenges US businesses are facing for the last few years, with the pressure not letting up any time soon.

The pandemic, the war in Ukraine, rising inflation and a shortage of goods have all contributed to organizations (big and small) feeling the financial pressure and struggling to stay afloat. But as many companies have learned since the pandemic, relying on too few suppliers can be problematic especially if there are supply chain disruptions or political unrest in countries like China and Taiwan – countries that manufacture goods for a large number of American companies.

Apple has learned this lesson the hard way. One of its biggest suppliers, FoxConn, suffered from a massive disruption when the Chinese government imposed COVID-19 restrictions on about 300,000 workers living at the Zhengzhao factory campus. What ensued was civil unrest and protests on a mass scale, which analysts estimate cost Apple $1 billion a week in lost sales. Even for a massive company like Apple, $1 billion is no small amount. And it could have been avoided if the company had restructured its supply chain and spread out work to multiple suppliers for each component of the iPhone.

Chinese manufacturing

But there’s another issue that needs to be addressed – the role of credit risk in supply chain management. And it’s one that can’t be overlooked by businesses (and their procurement managers) who are fighting to keep their heads above water. In this article, we’ll explore the pitfalls to avoid in supply chain management along with best practices to help you embed credit risk management into your supply chain strategy. 

Chapter 1

What factors should you be aware of to better manage credit risk in your supply chain?

New laws


Supply chain regulation is a shifting, complex landscape and businesses need to keep their ears to the ground for ongoing developments – at home and abroad.

A law that’s come into force recently that may affect supply chains on a worldwide scale is Germany’s Supply Chain Due Diligence Act. The law requires German companies and German-registered branches of foreign companies with more than 3,000 employees to create processes that assess and solve human rights risks in their supply chain.

The risks include:

  • Unethical employment
  • Forced labor
  • Discrimination

By using a German supplier who fails to comply with this regulation, American businesses could lose big time with heavy fines and even be barred from winning German contracts for three years.

A European Union bill covering a more extensive set of regulations for supply chain management is also underway and should be factored in for businesses wanting to expand their footprint overseas. For updates on supply chain regulations and credit risk on US soil, the Securities and Exchange Commission (SEC) keeps companies in the loop.

Political sanctions


Now, let’s discuss sanctions. They often develop through conflicts like the war between Russia and Ukraine and can have damaging repercussions for supply chains. In cases where sanctions are imposed on a business, the assets and credit of that company are frozen, making it difficult for partners to receive goods or services that they’ll certainly need to keep their own businesses running smoothly and cash flowing.

To be aware of specific sanctions and how they relate to different countries, you should be running an online compliance search on your suppliers to make sure they aren’t listed on any sanctions or PEP (Politically Exposed Persons) lists. When doing these compliance checks, make sure you can run searches on both people and businesses across multiple databases, including:

  • PEP (Politically Exposed Persons)
  • Current sanctions
  • Previous sanctions
  • Financial regulators
  • Law enforcement
  • Disqualified directors
  • Bankruptcies
  • Adverse media
  • Corporate registries

You can also consult the Office of Foreign Assets Control (OFAC). This governing body enforces trade sanctions based on US foreign policy. In line with OFAC regulations, companies are required to carry out due diligence when extending credit to foreign companies.

An example of this would be a US company buying uranium from a country in an Eastern European country and then that organization being linked to terrorism. In that scenario, the American company would be in violation of the regulations and could be fined up to $1 billion.

Political sanctions

Having the right skill set


The people who are focused on managing supply chains need to be aware of how to assess and identify credit risk data across multiple suppliers.

Think of it this way. Your procurement manager may not be a specialist in credit risk and if they don’t have the skillset for doing the necessary due diligence, such as knowing how to check international credit reports and making sense of the data in those reports, it could be a costly mistake.

Chapter 1

What can you do to minimize the credit risk in your supply chain?

Be selective with suppliers


When looking at potential suppliers, there’s a lot that needs to be considered, including:

  • The country in which the supplier is located (socio-economic and cultural factors)
  • The regulations in the country
  • The political climate in the country
  • The legitimacy of the organization and its officers/directors
  • The level of communication required for negotiating deals 

Even in the early stages of establishing a relationship, you need to be able to plan for changing circumstances.

Our US Enterprise Account Manager, Leighton Weston, provided a practical example of this:

“Let’s say you're selling nuts and bolts all over America and you import your products from an Indian steel company that suddenly files for bankruptcy and pauses all your shipments. You now need to find a new supplier of those nuts and bolts. So, what impact is that going to have on your business?

Is it going to raise costs? Is it going to lower product quality? There’s a lot of uncertainty from multiple directions that needs to be addressed.

But what you could do if you’re trying to adapt and save on costs is break down your existing suppliers into tiers and see who is best suited and necessary to keep your customers happy.”

Steel workers

Be proactive and automate your supply chain systems


According to the Association for Supply Chain Management (ASCM), big data and automation are the number one trend in their 2023 report for offering solutions to supply chain disruption.

Automated tools powered by artificial intelligence can solve many problems associated with supplier financial risk. For example, you can run a credit report on your international suppliers to quickly gather and assess the company’s financial performance and payment behaviors. The information that’s collected in these reports includes:

  • County Court Judgements (CCJs)
  • Director details and stakeholder names
  • Credit scores (a rating of 100 reflects a financially robust and healthy business, while a zero (0) rating indicates a business in severe financial, legal and compliance trouble)
  • Number of Days Beyond Terms (DBT) that invoices are paid
  • The recommended amount of credit limit that should be extended to an organization

Adding to the point about collecting the right financial data, Leighton had this to say:

“Doing a thorough credit risk analysis is just as important as identifying suppliers and negotiating a good price. A supplier may be able to give you a good price but if they're about to file for bankruptcy next week, they might not be able to deliver on that price forever. And that could leave your business in financial turmoil as well as leave your customers’ orders unfilled. So, you could be left writing business plans based on the potential liquidity and solvency of a supplier that you haven't conducted any form of financial risk analysis on.”

Secondly, integrating different systems improves processes, reduces headaches and provides a full supply chain picture. Procurement software may be useful for onboarding new suppliers and maintaining inventories, but it doesn’t give any insight into credit risk data. When you integrate it with a platform that’s designed for checking this information, you’re better prepared to protect your cash flow.

Thirdly, you can dramatically cut down on the time it takes to get paid with automated invoice processing from anywhere in the world. There are several benefits that come with this type of software.

  • You can say goodbye to manual data entry and stashing paper invoices for different currencies
  • You can set up an early warning system for supplier bankruptcies and get paid before they file for bankruptcy
  • You can free up important supply chain staff to perform other more critical tasks
  • You can cut down on duplicate invoices and accounting errors

The most efficient automated invoice software should be able to integrate with tools in different countries and factor in sales tax regulations and language for specific localities.

When asked about the ongoing development of automation and supply chain management, Leighton said: 

“Let’s say you’ve taken on Walmart as a new supplier and the company has a stellar credit score and high credit limit. Once they fill out the supplier onboarding application, automated software can plug them in to automatically adhere to your credit risk policy.

That’s where I see it going. A lot of these platforms will interlink with cybersecurity, look at ESG ratings and multiple sources to bring together a full supplier risk strategy.”

Online invoicing

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