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How to spot when a critical supplier might be about to go under…

1. Talk to them

All the time, not just once a quarter. You'll get a excellent feel for what is going on. Build good relationships and trust. Suppliers remember companies which have been good to them.

2. Set up a rating system
First find out who your critical suppliers are. Then analyse their financial performance, paying particular attention to cash flow as well as profitability.

3. Develop an early-warning system
Monitor many different aspects, including change in quality of their products, attempts to modify change in payment terms - these should set alarm bells ringing. Talk them immediately, they may be too proud to confess that they have problems.

4. Know your supplier's suppliers
Problems far down the supply chain can rebound. Make sure you have understand who are the sub-suppliers of your main suppliers. And be prepared to help.

5. Remember multiple sourcing is no panacea
Check the interdependence of your suppliers. If they supply the same companies, industries or countries, there is a higher risk of supplier B going broke if supplier A does too.

Key suppliers are the critical ingredients of any product or service. Having an early-warning system on the health your suppliers is clearly important, but it is not enough. Large companies have to be prepared to help their critical suppliers in many different ways because they are not only suppliers, they are partners.

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