Being left in the lurch by a supplier can be every bit as damaging to your bottom line as customer insolvency. Group Solutions Engineering Director, Andrew Share reveals Coface’s tips for staying on top of the risk.
Ineos Automotive was forced to suspend production of its flagship 4x4 off-roader in September 2024 after its seat supplier, Recaro Automotive, filed for bankruptcy in Germany. It wasn’t until January 2025 that Ineos Grenadiers were again rolling off the line at its Hambach plant in France, a costly delay for the fledgling brand at a critical moment in its development.
It's a telling example of the impact that a supplier’s struggles can have on dependent businesses. But while due diligence of customers is standard practice, the same scrutiny isn’t always applied to the supply side. That’s a problem when you consider the risks that lurk within today’s complex supply chains which have the potential to stop your business in its tracks, from disruption to shipping routes to the imposition of tariffs, to economic instability.
The good news is that there are straightforward measures you can take to mitigate supplier risk and protect your business. Here are seven tips from Coface UK’s Business Information team.
Know your supplier
Use the same due diligence process that you would when onboarding a new customer. That includes verifying the supplier’s identity to ensure they are a legitimate business (supply chain fraud is a growing problem in sectors like food) and scrutinising their trading history, current financial health and compliance with relevant regulations and industry standards.
You could manage supplier checks in-house but it can be time-consuming, and it makes sense to work with the experts if you want an added level of reassurance, especially with key suppliers in unfamiliar sectors or countries.
As a leading global credit insurer, Coface has more than 600 risk experts who make over 10,000 underwriting decisions daily and the same data, expertise and credit insights underpin our Business Information services. These include Coface’s unique Urba360 risk analysis tool which gives you instant access to our in-depth business intelligence on more than 220 million companies here and abroad, so you can decide whether you want to do business with them. The intuitive dashboard has six key indicators such as our Coface score which shows the probability of default, our credit opinion financial ratios and late payment index.
Assess the suppliers’ own dependencies and production capabilities
Dig deeper to determine whether a supplier has the capacity to meet your needs. This is especially important for seasonal businesses where there are peaks in demand or if you rely on just-in-time deliveries of raw materials or components.
It might be feasible for your purchasing manager to visit the supplier to see its operation for yourself, assess product quality and ask questions about order fulfilment, shipping etc. Alternatively, you could ask for references or speak to contacts in your sector about their experience. It’s also wise to keep your ears open to noise in the market about shortages or upstream supply issues so you can prepare contingency plans.
Monitor your supply chain
In today’s volatile economic climate, it’s important to have a comprehensive picture of your commercial risk over time, rather than an occasional snapshot. Proactively monitoring the financial health and performance of your suppliers will help you spot early warning signs so you can act while you have time. It is also vital to know your key suppliers, since they can present risk and unknowingly when they become insolvent it acts like a domino effect in the supply chain.
With an Urba360 subscription, you’ll be kept informed about suppliers in your portfolio and get customised alerts if there are any changes in real time so you can anticipate risks and opportunities. For example, Coface was able to update customers about the Recaro Automotive’s deteriorating position long before it filed for bankruptcy, changing our assessment from a score of 6 in mid-2021 to just 3 (high risk) in early 2023.
Keep an eye on sector and country risk
Stay in touch with developments that might cause problems for your suppliers. Are they operating within a sector which is vulnerable to critical shortages? For example, a global shortage of semiconductors between 2020 and 2023 had an impact beyond the electronics and telecoms sectors, including automotive manufacture and medical devices. In addition, economic or political instability in a supplier’s home country such as high interest rates, inflation or falling demand could squeeze suppliers’ margins and even lead to insolvency.
Coface regularly assesses social, economic and political risk factors and insolvency/payment trends across 160 countries and 13 industry sectors. These are updated quarterly and available on our risk dashboard.
Don’t forget logistical risks
Global trade routes have been severely disrupted by a series of shocks in recent years caused by the Pandemic, conflict and climate change. For example, the attacks on commercial shipping in the Red Sea has resulted in a 50% fall in maritime traffic through the Suez Canal in the last quarter of 2024 compared to the same period in 2023, with carriers choosing to reroute around the Cape of Good Hope.
Although these factors are outside your control, it’s important to be aware of how it might affect the supply chain in terms of longer journeys, delays and higher fuel costs. Think about contingency plans in the event of disruption and if you outsource logistics, ensure your provider has the necessary experience, network and resilience to manage sudden challenges.
Try to diversify
It may not always be possible but try to reduce your reliance on a single supplier to mitigate the impact of a sudden failure. It’s better to have contingency plans rather than panic measures which leave you more vulnerable to price rises and fraud.
Implement contractual safeguards
Check the small print in supplier contracts as they can leave you exposed if something goes wrong. Pay particular attention to areas such as scope of work, the payment terms, termination rights, warranties, liability clauses and indemnity against loss and get your lawyer to review if you’re unsure about the wording.
If a supplier demands advance payments for goods or services, you may be able to negotiate a reduction or consider ways to mitigate the risk such as advance payment bonds, letters of credit, escrow agreements (where a third party holds the funds) or supplier advance payment guarantees.
Coface Business Information services provide in-depth financial, trading, payment, and market data, backed by expertise from our global network of 700 risk underwriters and analysts. To discover how we can support your business, contact us today.
Companies that use our solutions have powerful tools to analyse their business partners and assess their financial health. By relying on our high-quality data, they optimise their decision-making in managing various risks: credit risk, commercial risk and financial risk. If you wish to see how we can help your business, you can now book a demo.
