Managing Supplier Risks in Uncertain Times

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Managing Supplier Risks in Uncertain Times

May 2020

By Jennifer Fredericks

Challenges from the COVID-19 crisis have had a major impact on the ways in which healthcare providers, municipalities, and other front-line organizations procure supplies.

 

An unprecedented surge in demand for personal protective equipment (PPE), ventilators and other items required to respond to the crisis has meant that many buyers can no longer rely on the trusted suppliers who previously provided such goods. Many items are out of stock. As a result, these buyers have had to find new suppliers to meet essential and life-saving needs.

 

But how can buyers be sure that an unknown supplier can deliver on orders in the quantity ordered and with the quality required? From the supplier’s perspective, how can they be sure that a buyer can pay for the order in full if it is not paid for upfront?

 

The solution to these uncertainties with new supply chain relationships is supply chain escrow.

 

A supply chain escrow account allows an amount of money to be placed in escrow by a buyer to assure suppliers that funds exist to pay for an order and that they have been reserved for that purpose. They also give the buyer the ability to control the release of those funds to the supplier. If the quantity and quality expectations of the order are not met, buyers can withhold payment until the supplier corrects the issue or the order is cancelled, without risking the loss of the payment, or undergoing a complex and even contentious process of getting a refund. Finally, supply chain escrow accounts can be used to set funds aside from a buyer’s typical cash flow, such as funds that have been donated and earmarked for a specific use.

 

Supply chain escrow accounts existed long before coronavirus emerged, but the need for them has become more pressing. They address urgent supply chain needs regardless of the risk event. Some buyers will even maintain escrow accounts in order to handle other scenarios such as hurricanes, floods, or other natural disasters. Because of the urgency of buyers’ supply needs, the need for speedy account opening and seamless management of accounts can literally make a life-or-death difference.

 

Buyers who want to manage payments to suppliers through supply chain escrow accounts should keep a few things in mind.

 

First, like opening any new account, supply chain escrow is subject to account opening regulations. Buyers must be verified via a Know Your Customer (KYC) check on a per-account basis. With existing clients, banks can normally complete this process quickly. With new clients, banks that have highly efficient and automated KYC processes offer buyers a significant edge.

 

Second, while there are many scenarios, the most common scenario is that buyers will need supply chain escrow accounts to be set up per vendor. This raises the stakes for quick and efficient account opening. Buyers also benefit here from their bank’s ability to help with standard escrow agreements, web-based account management tools, and tax documentation services.

 

Third, buyers need to be sure that their escrow account holder can act as a trusted agent as well as making the flow of funds into and out of such accounts quick and seamless.

 

These are challenging times, and even more so for organizations responsible for managing the spread of the virus, providing essential services during the crisis, and treating individuals who develop COVID-19.

 

Given the uncertainty around the pandemic, purchasing challenges could potentially raise new doubts with new financial risks as the situation evolves. Moreover, these risks will not go away as coronavirus subsides. They are built into supply chain management. Suppliers will likely continue to manage to a “just in time” and “lean” methodology, requiring companies that need surpluses of critical items to find innovative financial tools to balance the risk. With supply chain escrow, buyers can help do exactly that, and focus on their core priority of responding to urgent needs.

Jennifer Fredericks

Vice President and Principal, Business Development

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