Supplier assessment and evaluation is a crucial stage before the selection phase. A buyer should evaluate the supplier’s financial ability before choosing to start transacting with them. There are several techniques and tools for supplier’s economic assessment. These tools and method include the use of financial ratios, bankruptcy indicators analysis and the qualitative supplier distress evaluation. Concerning the use of financial ratios, the buyer should be able to compute some of the essential rates that show the supplier’s financial stress, ability, and relative performance. The financial ratios are divided into various categories which include, growth, profitability, activity, liquidity and leverage ratios. The liquidity ratios will help the buyer to determine the supplier’s ability to repay debts in the short-run. A high rate indicates the supplier reliability in repaying short-term debts. Leverage ratios show the methods a supplier or business uses to finance its operations. Some metrics of use in assessing the leverage ratio include assets, debt, and equity. A lower leverage ratio is attractive (Simpson, Siguaw & White, 2002). On the other hand, profitability ratios show how a company can make returns (positive gains) for its shareholders. Higher profitability ratios indicate higher supplier ability (Simpson, Siguaw & White, 2002).
Concerning bankruptcy indicator, the buyers should use the Altman Z-score tool. In brief, this tool combines several ratios, and the data can be used to predicate future bankruptcy among firms. Literature shows that the Altman Z-score predictor is 95% for forecasting bankruptcy a year before it happens. A buyer should never transact with a supplier who has a Z-score of less than 1.1 for such a business partner is at financial risk (Simpson, Siguaw & White, 2002). Other qualitative approaches include a spreading rumor of the supplier’s bankruptcy, a supplier who is always late or supply low-than-asked materials, rapid ratings on private websites, etc. A buyer should use these techniques and tool collectively to judge the supplier’s financial ability, reliability, and fitness for being a business partner.
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References
Simpson, P.M., Siguaw, J.A., & White, S.C. (2002). Measuring the performance of suppliers: an analysis of evaluation processes. Journal of supply chain management, 38(4), 29-41.
