Supply Chain health is clearly a serious concern for clients operating major construction programmes and projects during the Covid-19 pandemic. And understandably so, with redundancies, debt spikes and large six month losses being announced regularly in the construction press.
The viability of your critical suppliers is key to being able to operate and progress programmes and projects, meet SLA’s and protect your business and customers.
The truth is, in the world of Partnering, JVs and Alliance arrangements, many construction clients are in the dark about the impact of Covid-19 on their lower tier suppliers and there is little, if any direct relationship or oversight.
Clients typically have a relationship with a small number of main contractors or delivery partners who most likely only deliver 15 – 25% of the actual project themselves, with the bulk of the delivery being subcontracted out.
Traditionally there has been little direct engagement between clients and their lower tier suppliers, and therein lies the problem.
How much meaningful intelligence do your delivery partners either gather themselves or pass up to you around the health of lower tier suppliers?
Critically some of these suppliers will be small, highly specialist suppliers who are strategically very important to the delivery of your project or programme. If they are entering poor health this could pose a significant problem for your organisation further down the line.
Are you OK?
What we have observed is that whilst clients are regularly communicating with their main delivery partners and being told all is “OK”, there is a growing unease against the current background of so much pain being clearly experienced within the sector, that this standard one-word answer perhaps does not reflect the real situation?
There may be a concern that your partners may be sanitising the health of the supply chain and putting it in the best light possible.
You may have started to question what rigour there is behind the process which has informed their view?
In the pre-Covid-19 “normal” world you would clearly only ever bring suppliers into your business if they were credible and financially robust. This would be established typically on appointment through D&B type checks and financial questions. But that is typically a one-off check and not something which is regularly updated or monitored – so there is no established process for delivery partners to follow in the current climate.
Therefore, someone has got to start asking intelligent questions!
You will certainly have started to do this already … but our advice is to do so again.
Dig a little deeper and ask the following six questions of your senior team and delivery partners so that you can be confident you have an effective process in place which will provide you with the necessary foresight if a critical supplier is heading into financial trouble.
Six revealing questions
These are six simple questions you may want to ask:
1. Do you have an accountable person to report on supplier health?
Do you have a credible, senior person who is accountable for leading, managing and reporting on the process? Do they have the necessary, experience, skills and resources for the job?
2. Do you know who your critical suppliers are?
Before you can measure financial and operational resilience you need to know who your critical suppliers are.
As a large, intelligent client you will believe you have good helicopter view of projects, complexity, key suppliers, and key spend areas, but do you really know where and with whom you are spending your money? Do you have a granular understanding of your supply chain cost?
You will most likely predominantly communicate through a small number of main contractors who have taken the subcontractor problem away from you, and upon whom you rely on to manage and report delivery progress and issues.
Challenge yourself and your delivery partners; have you clearly identified in terms of criticality, not spend, your top twenty or thirty suppliers throughout the supply chain, whether subcontractors, material, or plant? If any of these suppliers were to go bust, which ones would you struggle to replace and which would cause you significant pain in terms of extra management time and/or cost.
These specialist, critical suppliers may be hidden in the second or third tiers and you may have no visibility of them yourself.
These are who you need to talk to first and as a matter of priority.
3. Are you talking regularly?
How many times have you spoken to your critical suppliers in the last three months?
Looking forward, do you have a regular, weekly, fortnightly, or monthly scheduled meeting to discuss financial health and wellbeing with your critical suppliers? Situations can change by the day as key customers are constantly re-evaluating their project programmes, mothballing and even cancelling major projects. Remember your lower tier suppliers have other clients too working across multiple sectors and all have been impacted differently.
4. Are you talking with the right person?
Ask who have you been talking to? Was it a Contract or Commercial Manager or did you get access to speak to a Finance Director?
In times of extreme financial difficulty suppliers may not be transparent when communicating with their senior team about financial viability, never mind externally to clients, so talking with the right person is absolutely key.
Going forward, you should look to schedule your meetings with the Finance Director who will be able to provide the most robust and meaningful answers.
5. Are you asking the right questions?
What questions have you asked your suppliers beyond the standard “are you ok?” to give you confidence around their financial health, and what supporting information and detail have you requested and analysed?
The twelve simple questions we would suggest a non-accountant asking a supplier to provide a good insight into its financial health are:
Order book and profitability:
· What does your sales pipeline look like for the second half of 2020? Is it stronger or weaker than this time last year?
· Who are your major clients within this pipeline? What have they confirmed or cancelled project wise in recent months?
· What will your profit return be for 2020? How does that compare to what you budgeted?
Borrowing and cashflow:
· Have you gone for any extra bank funding as a result of Covid-19?
· What’s your headroom on your borrowing? Are you near your limit?
· Does your cashflow forecast show it worsening over the next 6 months or improving?
People:
· Have you made any people redundant or imposed any pay cuts?
· How many have you furloughed, did you make up the delta and what proportion are back now?
Straight away the answers to these questions will provide a more objective picture based on a level of detail you can start to place some confidence in. If they are asked regularly and consistently across your critical suppliers, you will build up a comparable and more meaningful indicator of their relative financial resilience; providing insight as to where problems may occur.
6. How will you respond to the answers?
Finally, should the information you collect show a deterioration in the financial health of a critical supplier do you have an intelligent forum of commercial, contractual, and legal people established to work out what you are going to do about it?
You will need to be very careful how you proceed with existing or future contracts and payments and may need to consider limiting your risk via the use of performance bonds, project bank/ escrow type accounts as well as conducting contingency supplier research.
Asking these twelve questions of your senior team and delivery partners will give you some confidence that if a critical supplier is heading for trouble you will see the red flags emerging and be able to take appropriate steps to protect yourself and your customers.
If you need an independent, expert view an option is to appoint a specialist Chartered Accountancy who will conduct the triage process on your behalf and allow you to preserve your valuable supplier relationships.
