Continuous Financial Health Management of Suppliers

All companies have critical dependencies within their network of suppliers. Without a network of reliable suppliers, enterprise activities could not be adequately supported. A solid supplier network allows for cost-effectiveness, expertise, and innovation to thrive. However, ensuring suppliers are suitable and safe before and throughout the contract comes with challenges. Often suppliers are selected and engaged but subsequently become financially challenged, exposing the primary company to operational and reputational risks or, worst case, complete enterprise disruption. Having evidence-based confidence in the selection and management of suppliers is fundamental during two stages of the supplier lifecycle:

• Pre-engagement – By performing in-depth assessments on a supplier to ensure that the supplier can be a long-term sustainable partner before contracting.
• Post-contracting – Performing ongoing oversight during the engagement with a supplier to ensure that any deterioration in supplier strength is identified early enough to prevent incidents.

Financial health management for a global set of suppliers

Our customer had an extensive global supply chain with over 10,000 suppliers. Given its business model, there was a long-term dependency on each supplier, and ensuring their good financial health was fundamental. Given the large portfolio of suppliers, the customer faced challenges in obtaining the correct information and evidence to perform the financial health assessment. Furthermore, for a subset of suppliers, the pre-engagement assessment outcome was not meeting the minimum internal onboarding requirements. This subset required substantial support and remediation to either revalidate and onboard or safely manage out of the supply chain operations. The procurement and financial risk departments approached S&P Global Market Intelligence, wanting best practice processes that would be more effective and efficient than their current practice and meet their stakeholders’ needs.

Main challenges

One of the main challenges was related to the large number of suppliers, mainly private companies, whose financial information was not readily available. At the same time, the risks and events in the outside world created more disruption to the financial health of the suppliers. It was difficult to assess and score firms accurately due to the lack of timely, reliable, and publicly available information and evidence. These issues were compounded by a shortage of in-house expertise on financial health analysis using internal assessment processes that were non-standardized, inconsistent, and manual. The absence of a centralized system that could onboard all suppliers and allows for supplier oversight resulted in several incidents that negatively affected production processes. This created inefficiency, increased costs, and increased risk. Requirements to overcome these challenges:

• Provide assessment services focusing on the financial strength of every individual supplier and overall supplier portfolio.
• A Supplier Risk Management platform supporting automation in supplier onboarding; collecting due diligence information and evidence; conducting the assessment and scoring process; monitoring supplier strength; serving as a central register of information; and providing transparent reporting.
• A Credit Analytics capability to score financial information rapidly and fully as part of the due diligence process, producing a comprehensive financial assessment. Furthermore, the assessment must reflect the most up-to-date market conditions by overlaying the Credit Cycle adjustment to get a Point in Time Score.
• A Managed Service for a subset of higher-risk suppliers that do not meet the expected internal onboarding requirements and to best manage any challenge to the assessment outcome. For this part of the supplier population, strong interaction is needed to support them in the remediation of the financial health assessment shortcomings and, where possible, improve the financial health assessment outcome.

The solution & benefits for the customer

S&P Global delivered a unique combination of supplier risk and financial assessment expertise and solutions to support overcoming customer challenges. The offering utilized S&P Global’s best-in-class and cross-division products and services of Credit Analytics, and the Managed services facility. In particular, the following products and services were combined and delivered in one solution: Our industry best practice supplier risk management system S&P Global KY3P®  to perform supplier onboarding, outreach, and oversight. Expertise, analytics, and assessment capabilities of Credit Analytics to perform the financial health assessment and credit scoring via the RiskGauge Score and business credit reports. S&P Global Managed Services to provide remediation advice and management for suppliers not meeting financial health criteria set by the customer.

	Understanding global supplier financial health	Utilizing our holistic RiskGauge credit risk scoring capabilities, comprising elements of a company’s probability-of-default model fundamentals (PDFN), probability-of-default model market signals (PDMS), and CreditModel™ (CM) scores, we were able to construct aggregated overall Financial Health scores for every single supplier. Combining that with the KY3 solution enabled the client to have a risk view on a global portfolio level as well as on an individual supplier level.
	Efficiency and automation in the supplier risk process	Obtaining the correct information and evidence was a significant issue, especially for local suppliers and private companies. Also, there was no process for onboarding the entire supplier population and connecting that to an ongoing monitoring process for oversight. The Due Diligence and Onboarding and Oversight modules of KY3P were the right solutions to tackle these issues, automate larger parts of the process, and gain the right efficiency level.
	Monitoring of supplier performance and strength	The KY3P platform enabled the client to perform oversight activities over every individual supplier. An alert system was set up to ensure the client was alerted of significant deterioration in Financial Health scores. This triggered re-engaging with the supplier and focusing on issue remediation.
	Focus on high-value task	A turnkey third-party lifecycle solution was provided, combining automation for vendor data collection with leading expertise in Financial Health scoring plus a Managed Service for issue remediation. This combined solution allowed the client to focus their resources on high-value tasks such as overall supplier strategy, supplier engagement, contract execution, performance, spend management and build vs. buy decision-making.
	Remediate issues upfront or timely during the engagement	Issue remediation was provided via our Managed Services provides full life cycle support for the entire third-party risk management process. Our client looked for a holistic solution that streamline and solve risk challenges that remain outside their core business. Our solution enabled the client to focus on the risk and commercial outcomes, while we managed the issues with supplier.

Learn more about S&P Global Market Intelligence's KY3P  and Credit Analytics solutions.