Supply Chain Dark Clouds

The times they are a changin’!

First, the Coronavirus putting the international supply chain into question. Now, with news of the virus spreading, we are looking at possible business slowdowns, absenteeism, delayed or cancelled orders. Supplier qualification has become a whole new ballgame.

Here in Minnesota for example, there are some 8,500 manufacturing companies. The majority of which, (like 80%) consist of 50 people or less.  If you are sourcing domestically, odds are you are going to find and assess one of these manufacturers.  

Many evaluations focus on the operational side of the supplier. Technical prowess, equipment capability, planning and scheduling, purchasing even.

What about financial?

With the majority of manufacturers being smaller, they are likely privately or family held entities. As such, requests for financials will be received with a cold shoulder.

That doesn’t mean you have to fly in the dark. There are many financial metrics that, while not divulging specific numbers, they give you an idea of how things are looking.

Metrics like:

The quick ratio, an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets.

The current ratio, a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.

Days payable outstanding (DPO), a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which include suppliers, vendors or other companies.

Days sales outstanding (DSO), a measure of the average number of days that it takes a company to collect payment after a sale has been made.

Return on invested capital (ROIC), a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its money to generate returns.

All of these will show the relative health of a company and their ability to manage their financial situation.

So, if you need help making your re-sourcing decision, make sure you inquire about both sides of the building.