Treasury Insights

Risk Management: Best Practices

Reducing risk in the financial supply chain

A woman heading a business meeting

With any business program, there's the potential for failure if it's managed improperly. Key risks to the financial supply chain include:

  • Counterparty risk. Buyers and suppliers should be concerned with the possibility that either party may not fulfill its obligations. The supplier may fail to deliver orders on time, in the quantities necessary, or of the proper quality. The buyer's financial circumstances may deteriorate, causing the credit arbitrage associated with early payments linked to approve invoices to become less attractive. Or the buyer could lose the early payment offering altogether as banks retrench due to poor financial performance.
  • Transaction risk. As with all forms of supply chain activities, the execution of the actual movement of goods and services, and ultimately payment, could be delayed or fail.
  • Concentration risk. This risk can affect either buyer or supplier. It occurs when both parties rely too heavily on the business partnership — that is, a larger portion of sales of a critical product is with one buyer, or the buyer relies on one or very few suppliers to provide a critical good or service. Diversification can mitigate the risk for both parties, as can the use of core supply chain finance solutions.

The good news is you can employ a number of mitigation strategies to reduce risk in the financial supply chain, including:

  • Create a formal team to monitor the supply chain finance program, with responsibility for conducting regular reviews of trading and financing partners and for providing internal cross-functional updates.
  • Review payables and receivables processes and techniques across the enterprise for internal optimization techniques and insight into poorly performing vendors.
  • Formalize processes and policies and communicate these regularly, both internally and to supply chain parties. Ensure that these policies are enforced through proper checkpoints within the process.
  • Develop contingency plans, including alternate financing options, to ensure business can continue for a period of time given a failure in a primary form of financing.
  • Work with transportation/logistics providers and financial institutions to obtain greater visibility into the movement of goods and the procure-to-pay process.
  • Explore a variety of financial instruments that might minimize risk, including:
    • Trade letters of credit
    • Supplier finance models that include a buyer-approved invoice and nonrecourse early payment to the supplier
    • True sale of concentrated receivables
    • Credit insurance to protect against payment default
    • Accounts receivable puts, which provide insolvency protection to the supplier

As businesses grow, the importance of control over sourcing and the supply chain becomes more critical. A formal governance model, cross-functional teams, contingency plans, and ongoing review of trading partners are all integral to enhancing critical supply chain operations.

Treasury Strategies Inc

For more information, contact your Wells Fargo representative or fill out the Contact Us form on this site.

Print this page