IMIG project report about supplier financial background evaluation at a Manufacturing Company in China
Why is such an assessment necessary?
Under the economic globalization, the suppliers of multinational enterprises being all over the world, many enterprises focus so much on how to manage suppliers to achieve a win-win situation. It is not meaningful to the development that most enterprises have developed their own supplier evaluation system (Including market share, social responsibility, operational management capabilities, contract management, and etc.) or using current industry standards (such as VDA, IATF16949, ISO9001, OHSAS 18001, GMMOG), to evaluate its suppliers by Purchasing / Supplier Management department. Thereby reducing the risk brought by the suppliers is necessary for the enterprises.
Nevertheless, the purchasing department or the supplier management department often ignores or does not care much about the financial management of the suppliers. Generally the company only requires the on-time delivery instead of the inventory, loan of the suppliers, and even the financial risk brought by the suppliers resulting from its poor assets management. There is no doubt that the cost will definitely rise, and therefore the unit price will increase to bear the rising cost or face with the loss and poor operating performance. Even more serious is the risk of broken fund chain of the suppliers. Regardless to which of these two results happen, it will directly influence the purchaser:
- Increasing procurement price
- Potential product quality defects caused by suppliers
- Late delivery
- Broken fund chain of the existing suppliers and the increasing cost & fluctuations of re-developing of suppliers
Sometimes it just helps to change the suppliers, like purchasing products at the supermarkets because the market is very transparent. However, for most industries, changing suppliers will arouse many problems and uncertainties as well as higher costs. Therefore the effective financial evaluation of suppliers and the urging of current suppliers to pay attention and rectify their financial risks is the basis for ensuring a win-win situation for both parties.
Supplier’s financial assessment is mainly reflected in the overall management level of the assets. Fixed assets, current assets, long-term liabilities, short-term liabilities and other relevant information are all included. There are corresponding ratios to these items (standard ratios may vary from industry to industry: for example, inventory turnover can reach tens or even hundreds in the processing industry while up to six times per year could be regarded as a world-class benchmark in some large equipment manufacturing industries).
As a supply management department, it is necessary to review the supplier's balance sheet on a regular basis (such as yearly), which is an effective means to timely discover the supplier's business problems. Cash flow, inventory levels, inventory turnover, short-term liabilities, and etc. may affect the supplier's future performance, and it is also a guarantee for the purchaser to get annual price discounts
Yet most suppliers are unwilling to expose their financial situation to the customers as they believe it should be very confidential and it is easy to reveal commercial secrets. Apart from that, suppliers think they will be restricted during the annual price negotiation phase when customers know clearly their financial situation. At the meantime, even the suppliers are willing to show their financial situation to their customers. The purchasers or the supplier management is not capable to analyze the data, provide effective suggestions on the financial analysis, or is unable to help suppliers to improve because of gaps in the professional financial knowledge.
Approach of IMIG
In response to the challenge, IMIG China has developed a supplier financial background evaluation plan – “Financial Health Check” for multinational enterprises and has successfully conducted financial evaluations and has been providing professional opinions for more than 20 suppliers.
Fig. 1: Data collection process
Analysis & Assessment
First of all IMIG China obtains accurate financial data through IMIG-China's unique channels based on supplier information provided by customers, and then classifies the data and evaluates the following criteria according to the actual industry status where suppliers locate:
- Repayment Ability: Evaluate the assets safety of the supplier and the risk of capital chain breakage by analyzing its short-term and long-term repayment ability and short-term liquidity.
- Assets Efficiency: Assess the supplier's assets management performance and assets utilization efficiency by analyzing its assets turnover.
- Profitability: Evaluate the profit generated by per unit of assets and the profitability of the total assets value through the profit and return on assets.
- Operational Capability: Summary the supplier's operation management capabilities by analyzing its accounts receivable, turnover, inventory turnover, and sales trends / forecast.
After analyzing, IMIG China will score each criteria and calculate the results according to the weight defined and aligned with the customer, and finally offer customer “Financial Health Check” report under the overall consideration of the scale, investment, legal proceedings and other relevant information.
At the same time, according to the supplier's financial risk level and some other data, IMIG China will provide professional suggestions to suppliers, such as establishing supplier assistance procedures, helping suppliers improve their operation management capabilities, and mobilizing idle assets to achieve more profits.
Throughout the entire evaluation process, the suppliers are not required to participate in any evaluation activities, only if the suppliers are advised to implement improvement. IMIG China will be involved in the whole evaluation process as well as in the following improvement activities and offer all parties our professional suggestions.
Managing Director I IMIG China
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