Since the outbreak of the Corona pandemic two years ago, global supply chains congestion has threatened the existence of many companies. The supply bottlenecks extend across industries and products – from A for aluminium to Z for zippers.

Supply Chains Interruptions

Almost daily we read about interrupted supply chains, backlogs of orders, price increases for energy and raw materials, payment defaults and economic difficulties of companies. Many of these are pandemic-related after-effects and the war in Ukraine is fuelling the tense situation even further.

Since the outbreak of the Corona pandemic two years ago, global supply chain congestion has threatened the existence of many companies. The supply bottlenecks extend across industries and products – from A for aluminium to Z for zippers. Electronic parts and metals in particular, but also wood and packaging, are in short supply and more expensive due to the change in demand, and limited transport capacities are driving up prices even further.

„Supply Chain Risk” force field

What is striking about individual risks in the supply chain is that a general assessment is very difficult to estimate due to their possible “spillover effect” on other areas of the company.

Risks in the supply chain can be quite diverse. They can range from minor disruptions to the destruction of the entire chain. Minor problems – especially due to close business dependencies of the individual companies in the supply chain – can already cause considerable difficulties and trigger the well-known domino effect.

When financial strength is in short supply

What is striking about individual risks in the supply chain is that a general assessment is very difficult to estimate The current pandemic also shows that companies can get into a financial crisis or even become insolvent despite full order books. This predicament is caused by several special effects that – considered individually – could have been managed. These include delays in processing and invoicing orders, significant price increases in the procurement markets and longer delivery times. In addition, transport and logistics are sometimes subject to massive price increases and delays.

Sales activities, project processing and service business (especially in the project business) also suffer from the travel and quarantine regulations of the individual countries and further aggravating the situation. If price increases cannot be passed on to customers, or only partially, due to existing long-term contracts with buyers, the economic situation becomes even more acute.   

Full order books and yet insolvent

If the flow of goods falters or even comes to a standstill because missing materials or product parts interrupt the production, the spiral turns further downwards.

There is a lot of talk about back shoring or nearshoring production, but finding and implementing alternative sources of supply is difficult in the short term and usually expensive, plus many inputs cannot be sourced in the EU either. A supply chain disruption can be responsible for a massive loss of revenue if goods do not reach the customer on time or at all. Negative effects can include penalties, a possible loss of follow-up orders or the loss of key customers. In short, long-term disruption of supply chains can put a company under severe pressure and ultimately even lead to insolvency – both on the supplier side and the customer side.

Risk management through creditworthiness information

The risk management process of credit risks on the customer side can of course also be applied to the supplier side, although with increasingly long and complicated supply chains it is not always easy to know all risks sufficiently and to keep up to date.
 
Many companies use credit insurance to cover the debtor risk, whose core service is to check and monitor the creditworthiness of their buyers. But up-to-date information on financial stability is important not only on the debtor side but also on the supplier side.

Conclusion

In the face of pandemic supply difficulties, creditworthiness checks and monitoring should not be forgotten, from the supplier’s upstream supplier to the customer’s customer. All the more so when the supply chain encompasses all services – from creation to delivery of the finished product. So it’s not just the production process and the flow of trade that needs to be ensured, rather one of the key questions is: “How are my key suppliers doing financially?” The credit check provides the answer.

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Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 5 04 04 280