Supplier Risk Seen Improving in Retail Industry

Financial performance improvements in key supplier sectors driving stability, CVM reports based on latest analysis of supplier financial data

Chicago — September 21, 2009 — Supplier risk in the retail industry is easing after steady worsening over the last two years, although specific supplier subsectors still are experiencing financial difficulties that may present risk for their retail customers, according to a new analysis from enterprise supplier management solutions provider CVM Solutions.

"While retail supplier health has not returned to pre-recession levels, the upswing in financial stability of key suppliers during the first two quarters of 2009 is a positive sign for the retail community," said Jon Bovit, vice president of marketing and strategy for CVM Solutions.

However, Bovit noted that CVM's analysis also showed that such sectors as business services, industrial products and especially electronics still present some level of risk for retailers. "Of the eight supplier subsectors we analyzed, electronics appeared to be still suffering from the stagnating economy, likely due to over capacity and sharp price reductions on big-ticket items," Bovit said.

Earlier this year CVM issued a report on risk levels among automotive suppliers. The company produced the report on retail suppliers based on requests from customers in the retail space, according to Bovit.

To determine retailers' supplier risk, CVM utilized a sample data set from its Master Supplier Database. The data, covering the two years from June 2007 through June 2009, included many of the top retailers in North America. CVM then selected key publicly traded suppliers to these retail customers and calculated an "Altman Z-Score" for each customer and supplier to objectively measure risk.

The Altman Z-Score is a financial analysis model that examines five company financial ratios and is intended to be highly predictive of a company's bankruptcy risk. An Altman Z-Score of less than 2.6 is considered "high risk."

CVM segmented the suppliers into eight sub-sectors — apparel, building products, business services, electronics, food/retail drug, home furnishings/appliance, industrial products and non-food retail — to evaluate risk by category.

The resulting analysis showed that the retailers' stability had started improving back in the beginning of this year and that direct suppliers to the retail industry seems to be trailing the retailer recovery by at least a quarter. The resulting analysis showed that the suppliers average Altman Z-Score bottomed out in the last two quarters and has remained at 3.46.

Most sub-sectors had scores of 3.1 or higher, with the exception of electronics, which dropped to 1.78 at the end of the second quarter of 2009; industrial products, with a score of 2.44; and business services with a 2.74.

 CVM Supplier Analysis Data
Altman Z-scores for sub-sectors within retail industry. Scores of less than 2.6 are considered high risk and are highlighted above. Source: CVM Solutions.

In addition, CVM found a relatively low level of shared suppliers among the retailers it examined, 4.8 percent versus 7.3 percent in the auto industry. "That would lead you to believe that even there are some high risk areas, they won't bring down the sector as a whole, and that's a positive finding," Bovit said.

Nevertheless, CVM suggested that while the industry as a whole is trending in the right direction, direct suppliers to the retail sector seem to be trailing the retailer recovery by at least a quarter, and overall the health of the retail sector is nowhere close to pre-recession levels. "We are seeing a turnaround with the retailers, and the direct suppliers will see improvement as their customers' business starts to pick up and they begin to deplete older inventory," Bovit said.

Mitigating Risk

To ensure their business will not be impacted by high risk suppliers, Bovit said that CVM recommends that retailers perform a detailed supplier risk assessment on all critical, strategic and high-spend suppliers.

Risk analysis can include the Altman Z-Score; third-party risk score; independent financial assessment; tracking of bankruptcy, liens and judgments; and other factors such as compliance with federal and state regulations.

In addition, retailers should define supplier qualification standards and enforce compliance for all suppliers, while proactively defining and monitoring risk with regard to strategic suppliers, according to Bovit. "The new world order is that if you're not doing this now, you're going to get hit at some point in some part of your supply chain, so it's still a very prudent practice to measure and manage supplier risk," Bovit said.

CVM positions its Master Supplier Database as a standard central repository for supplier data for Fortune 1000 companies. Due to the underlying contributory data model, where CVM customer use contributes to the supplier data as a whole, the database contains detailed data on what CVM says are the most relevant and highly used suppliers. The database consists of millions of suppliers and their locations globally, and it updated using data from more than 1,000 different sources and a high quality review process.