EVALUATING SOURCES OF SUPPLY

Evaluating sources of supply may be more critical than evaluating what’s being supplied. After all, the best equipment or service on the planet is greatly diminished in value if it can’t be depended on. Repair, replacement parts, and upgrades are important life cycle extenders. The latest gadget has diminished value if your organization gets sued for patent infringement by the supplier’s competitor and the entity the gadget was purchased from isn’t around, or doesn’t have the resources to defend itself and its customers in such an action. No matter who is right, the outcome is less than satisfactory.

If your organization uses a purchase order process (i.e., limits the power to commit funds to be paid in exchange for goods and services using a purchase order form) then it’s likely the individuals authorized to issue POs can conduct supplier due diligence. Initial or preliminary due diligence is general in nature and does not require any technical subject matter expertise beyond a qualified purchasing representative’s knowledge of buying what the acquiring organization needs for its business. As project planning proceeds and technical concerns arise, subject matter expertise will be needed to complete the due diligence process.

Evaluating sources of supply is a process whereby accounting, contractual, legal, and technical subject matter expertise investigate and quantify potential risks of doing business with an unknown third party. It involves an examination of the entity’s financial health, ability to produce deliverables in the level and amounts required, and its ability and reputation for post-deliverable support of whatever type is required by the acquiring organization.

Evaluating the financial health and stability of a potential supplier can be accomplished by examining a set of audited financial statements covering a period of time in the past. Publicly traded entities that are potential suppliers are required by law to file quarterly and annual financial statements. If the potential supplier is not a publicly traded company, then there may be other sources of financial information such as Dunn & Bradstreet. D&B is a credit rating organization, providing credit history and assessment. As such they have access to information on most any entity that wishes to do business on credit. They also collect information about how the subject pays their bills. 

For example, do they pay on time, or according to agreed on terms, or are they occasionally or perpetually behind? These same agencies also monitor and report on lawsuits and extraordinary events that may have an impact on the company. Considerations or concerns about the potential suppliers intellectual property rights may be found in simple searches that can turn up patent or copyrights granted.

The overall concern amounts to the ability of the supplier to produce and support the required quantity of equipment, software, or facilities and services for the time required, typically ranging from 2 or 3 years to longer than 10 years. The ability to conduct due diligence isn’t rocket science; it’s mostly a matter of common business knowledge. You and your peers in accounting that deal with purchasing, contracting, and paying bills can undertake and complete it with a reasonable amount of time and effort.