Your expertise in investigating and analyzing the finances of other companies may not be limited to customers anymore. More and more credit managers are now being asked to determine whether key suppliers have the wherewithal to stay dependable in a more and more chaotic economy. If you haven't had that assignment yet, it's probably coming.

Jay Woulfe, Credit and Finance Manager at Trelleborg Automotive has been handling supplier approval for some time. In the old days he'd just update the supplier files annually or as needed. Then, four years ago, this changed abruptly.

So Woulfe combs the financials and discusses his concerns with his colleagues in Purchasing. He looks at several elements, just as he would with a credit applicant or customer--especially liquidity, leverage and such antecedents as how long they've been in business and their reputation.

"They come in and talk to us, to Purchasing mostly," he says. "I'm just one cog in the wheel. If they meet all of our standards and their production facilities are up to snuff, everyone loves them. Engineers and buyers may love working with them. That's great. But, if I say there's a financial question, they have to improve their performance, that's obviously not an overnight thing." But sometimes the improvement doesn't happen at all, and if that's the case, says Woulfe, they don't allow them to bid on new business.

What if Purchasing fights this? It's ultimately purchasing's decision. Woulfe's decision can be overridden. It may be that they don't have another supplier who can do what this one does. Maybe they're too committed. They can't just pull all of their tools out and send them somewhere else quickly. Woulfe is usually dealing with the supplier's CFO, controller or president.

These companies come in all shapes and sizes. Some are $100-million operations and some are $100,000. He does a Z-score rating on them and looks at their capital structure and their line of credit. "I've seen cases of small suppliers who were not doing very well, but, if we gave them all the jobs they bid on, their sales would triple--as, of course, would our exposure," he says.

He cites the situation of one supplier he recommended against continuing to use last year. "We were in bed with them pretty heavily, and we still are." They came up for review again, and he turned them down again. He had a call scheduled with the president to discuss his concerns.

"You always hear of Credit and Sales bumping heads. It can happen with Purchasing. Our buyer may tell them 'Come in here to make Jay happy and get approved.' But I have to tell them that we can't just rearrange some numbers and then they're fine. These things take time, and they may never be approved." Woulfe doesn't think that many suppliers have a full understanding of the financial side of things. Instead, their expertise is concentrated on things like how to produce parts. They typically understand how to tweak the manufacturing process to meet quality standards. But you can't just tweak a balance sheet to be up to code. So part of Woulfe's role is educating internal staff on these types of challenges with their suppliers.

Woulfe's supplier review and analysis responsibilities have been intensified by a big push to source internationally. Getting financials from foreign supplier is a real challenge, and when you do get them they're in foreign currencies, with financial statements that may not be structured the way U.S. financials are. Three Step Process
Over the years, Woulfe has developeed a three-step process to evaluate suppliers. To see that process, read the full article in our members-only section.

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