Today, global supply chains are under constant pressure from a myriad of factors: geopolitical tensions, economic uncertainty, changes to government incentives, severe weather events, labor constraints, and evolving consumer expectations are all challenging Supply Chain teams to remain agile.
It doesn’t end there, either. The recent rise of tariff and retaliatory government actions have ascended the corporate agenda as a major disruptive force in global trade. And, for good reason. Tariffs are a complex instrument that typically lead to higher costs, reduced profit margins, dampened consumer demand, production delays and slowdowns, among other disruptions.
It’s no wonder, then, that tariffs often form the crux of any discussion on current supply chain disruption: they are visible and easy to track. However, the introduction of higher tariffs alone is unlikely to cause supply chain disruption; rather, it’s more likely to be your supplier’s financial instability (exacerbated by tariffs) that causes the breakdown. While tariffs have proven an unpredictable force in the economic landscape, that’s not to say their impact is unmanageable. Indeed, building a resilient supply chain includes identifying which suppliers have the financial strength to survive disruptions such as tariffs, inflation or other external events.
Determining whether a supplier is financially strong enough to withstand any external shocks is an integral part of effective strategies for supplier selection. For instance, some suppliers may be able to absorb increased costs driven up by raw material or a manufactured component that fall under 10% or even 15% tariffs. Most Japanese manufacturers, meanwhile, face 15% tariffs, and most imports from the United Kingdom are expected to enter the United States with a 10% surcharge.
Others, meanwhile, and especially smaller suppliers or those already in unstable financial conditions, may struggle even with a 10% levy and definitely with a 20% burden. If unable to transfer the tariff cost upstream, they may resort to cutting operating costs and investments—which, in turn, may result in deprioritizing customers who force them to absorb tariffs (in effect, leading to a reprioritization of the customer base). Other ramifications may be plentiful, too, including delayed deliveries, quality degradation, and – in most severe cases – even operations shutting down due to tariff policy changes. And, if supplier financial health is not closely monitored throughout the relationship, there is unlikely to be prior warning for a Supply Chain team to proactively consider remediation ahead of time.
That’s because, for many companies, financial risk checks happen only once during the onboarding process. After that, the focus tends to shift to key performance indicators (KPIs) like delivery times, quality, as well as compliance. While KPIs are undoubtedly crucial to assessing performance, they alone fail to provide the big picture. That’s because financial risk often manifests as a silent and hidden threat. Indeed, under-pressure suppliers rarely communicate problems directly; and instead the early warning signals often manifest as changes in payment behavior, production problems, or workforce reduction. Supplier monitoring, therefore, should focus on indicators beyond operational performance – else Supply Chain teams may miss the early signs of supplier vulnerability.
While tariffs may be an unwelcome cause of supply chain pressure, oftentimes financial fragility is the underlying cause of any supply chain disruption. This is why, in our view, developing a robust yet efficient process around continuous supplier monitoring is critical: what you measure can be managed.
An effective process does not necessarily mean conducting detailed audits of every supplier, but rather it’s about prioritizing attention on the most important ones. Using financial risk indicators, monitoring changes, setting up early warning signals can you help detect signs of stress before they impact operations and support better decision-making around supplier continuity.
At Moody’s, we leverage our deep experience in financial risk analysis to help organizations navigate complex challenges, build greater resilience to external shocks, and make informed decisions. By curating comprehensive and comparable data on suppliers, and applying advanced analytics with artificial intelligence (AI)-driven methodologies, we provide businesses with useful insights for evaluating performance – and develop a robust and strategic approach to supply chain risk management. Our focus is on enhancing decision-making and supporting organizations to proactively address disruptions, strengthen supplier relationships, and mitigate emerging risks in an ever-changing landscape.
You can learn more about our supplier risk capabilities here.
Click here for more information about how Moody’s can help you quantify and manage supply chain risk, or you can use this form get in touch with the team – we would love to hear from you.