A majority of European CPOs believe that suppliers’ financial health has worsened in recent months and is having an adverse effect on their businesses, according to a new poll.
The CPO Club Index, a survey of 35 procurement leaders in major European companies conducted by AT Kearney, found that 57 per cent believed suppliers’ health had worsened in the first quarter of 2009. Just 5 per cent thought it had improved.
“Concerns associated with the financial health of companies across markets and industries have clearly amplified compared to the last quarter and might trigger ripple effects, with increasing risks of lay-offs, business discontinuity and softening consumer demand as unemployment rises,” said Jules Goffre, a partner at AT Kearney in Munich.
Discussion of the issue dominated the Club’s bi-annual meeting in Copenhagen earlier this month. The CPO of a major global consumer goods company told his peers: "Supplier health is one of the key issues for our company right now… It's something I really struggle with."
He told the meeting (held under Chatham House rules) that internal analysis had shown it had 500 suppliers that could have a €5 million-plus negative impact on revenue if they went out of business. As of today, his company was dealing with 17 "quite critical insolvencies".
But knowing which suppliers were most vulnerable, and what to do with the information once you had it, was a serious challenge, he said.
"The biggest issue I have is supplier risk," agreed the CPO of another big FMCG firm. "An awful lot of time is being spent on this [but] there aren't many reliable tools out there."
And it wasn’t just an issue for procurement. "I've never been as close to the CEO as I have over the past six months," he said.
The same CPO argued that although supplier health was at the top of the short-term agenda, looking further ahead the issue could be inflation and capacity shortages as a result of lower investment by suppliers during the recession.
"I have my top people out around the world as we speak looking at alternative suppliers and blocking capacity," he explained. "I need to be number one on their list – I can't afford not to have these materials."
Although the CPO Club Index found that current market conditions for commodity availability and pricing were generally favourable, 43 per cent of respondents believed that weak investment was already having a negative effect on their businesses.
Another CPO present at the Copenhagen meeting described the threat of future inflation and supply shortages as "a bomb exploding in our faces".
Yet another asked: "How do we prepare our people globally for what's coming in the next three years?" Most had never worked in this type of environment and simply didn't have the skills and experience that would be needed, he believed.
Overall, the CPO Club Index – which also surveys members’ attitudes to global political and economic conditions – stood at -14 in the first quarter of 2009.
This was less negative than the third and fourth quarters of 2008, when the index was -23 and -52 respectively, suggesting that the speed of economic deterioration has slowed.
