Large U.S. based and multi-national companies shutting down or reorganizing under bankruptcy protection make daily headlines. Smaller tech companies or local and regional retailers closing their doors sometimes appear in the business notes in the local newspaper or community social media site.
But small- and mid-sized businesses, the backbone of the supply chain, often close with a whimper — a bounced email or a dead website being the only clue.
Buyers need to be on their game to identify suppliers in the critical path and either find new sources or help those in need.
While mid-sized businesses may be at risk, they often have the financial reserves or borrowing power to make it through tough times. But that is not often the case with small businesses, and it's their failure that may have the greatest impact on your business and customers.
In your immediate supply base, consider the small prototype machine shop with barely a dozen employees, the landscaper with a small seasonal crew, the individual consultant working to solve your ERP issues or the three-person boutique marketing firm revamping your company’s social media strategy. These direct suppliers may or may not be at risk. But if they closed, you could replace them with new vendors. This sourcing exercise is within your control.
But the small businesses in the extended supply chain, hidden from view in the lower tiers, present the most risk and the least amount of control. The long tentacles of the supply chain contain many small businesses, a portion who might be at risk for survival at any time, not only during a pandemic. These indirect companies pose a danger to the performance of your primary suppliers.
Buyers need to take a multi-phased approach to small business risk through data analysis, supplier rationalization, risk mitigation and commitment to our community of suppliers.
It is time to classify our suppliers, not only by commodity or their product or service offerings, but their business structure. Are they large, mid-sized or small businesses? HUB suppliers? Local, regional, domestic or international?
This data needs to be readily available to help create and execute our procurement strategies. Compile this data through survey tools or traditional supplier contact methods.
Now that we have identified our small business suppliers, it is time to look at the scale and scope of their business.
Look for small business suppliers in the critical path and determine if this is the right supplier choice. This is not to say that small businesses should not be in the critical path. Like any supplier, they need to be financially sound and organizationally stable. Validate your past sourcing decisions and be sure to take company size and financial health into consideration for new sources.
While risk profiles should be assigned to all suppliers, or at minimum to critical ones, pay careful attention to businesses at financial risk, including mid-sized or large suppliers. They may show the veneer of success even as they struggle.
Pay attention to economic trends, industry reports, company financial results and other market related issues. Be sure that your prime suppliers are cognizant of the stressors in their extended supply chains. Ask to see detailed analyses and be prepared to make changes to mitigate potential or actual risk.
Most business we deal with are small businesses, and successfully so. I am in no way advocating to eliminate them, but I worry about the stress test that COVID-19 is adding to their business operations.
We are in a position to help them with our continued support, empathy, purchase orders, guidance and coaching. Be open and honest with their management, offer to speak to their lenders, change contract terms to help them with cash flow, and if necessary, prepay for portions of orders to keep then on their feet.
Not all small business will need this level of support, but for the ones that do, your ability to help them succeed will not be forgotten. Prove that supplier relationship management is not just a fashionable buzzword or an empty promise.
We have a moral and ethical obligation to help our small business suppliers survive the current economic storm. It is good for their business, and for ours.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.