Coronavirus Impact: Eleven percent of suppliers move to high-risk category
The Coronavirus pandemic has led to widespread economic shutdown, affecting businesses – big and small – on an unprecedented scale, leading to fears of cash crunch.
While the economic outlook continues to worsen, financing conditions in the U.S. have been gradually improving after the Fed’s historic liquidity facilities. The now combined $2.3 trillion programs have been a tremendous support for borrowers, with investment-grade corporates benefitting most, according to ratings firm S&P Global.
U.S. companies drew down about $230 billion from revolving credit lines from the beginning of March through April 9, according to an analysis by Goldman Sachs. The largest portion—around 17 percent—went to companies in the automotive industry, with about 15 percent going to retailers and 10 percent to travel and leisure service providers.
Overall, in this scenario, access to credit and cash flow position in a company’s balance sheet becomes critical for an entity’s survival.
Beroe has been receiving multiple client requests to determine the business survival chances of their suppliers. And to this effect, Beroe has been analysing a supplier’s likelihood of ceasing operations or becoming inactive over the next 3 to 12 months based on level of predictive data attributes that are currently available.
Specifically, BEROE WIRE Rating predicts the likelihood that one of the following events will occur for the suppliers:
- Voluntarily or involuntarily go out of business
- Become dormant or inactive
- File for bankruptcy
“Our model predicts the chances of a supplier’s ability to survive the category market conditions prevailing in a particular region. Our clients are looking for specific information such as category-wise, region-wise supplier risk. Cash is king in these times, and we try to analyse what percentage of suppliers run the risk of running out of cash,” said Praveen Dahiya, Beroe Inc’s Head of Risk.
As on April 20, Beroe has analysed hundreds of suppliers of several marquee companies across the globe.
The analysis show that 29 percent of suppliers have moved from low risk to medium risk, while 3 percent of them have zoomed to the high risk category from being in the low risk segment. A further 8 percent moved from medium to high risk category. Overall, 11 percent of suppliers have moved to high risk category over the past three months, as per Beroe data.
“Three percent may look like a small number but if you analyse it keeping in mind the Procurement Organization’s context, then the seriousness of the situation would be revealed. Most, if not all, are important suppliers for the companies. And the last thing you need is your critical supplier closing shop all of a sudden,” Praveen said.
The Way Out
As supply chain experts Rob Handfield and Dr. Ian George wrote in a previous Beroe blog post that if you do not talk to your suppliers now, do not be surprised when you call them this fall and receive no reply. Supply chains are in this together, and now is not the time to act in an “every man for himself” mode.
Organizations that attempt to deal with everything in isolation simply find themselves moving problems from one place to another without showing overall gains. Taking a systemic approach improves the entire supply chain and offers a manageable strategy for continuously improving performance with limited resources as staff self-isolate or fall sick.
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