Examining Financial Health Ratings and Supply Chain Resilience

June 24th, 2022 Hannah Tichansky Reading Time: 4 minutes
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A Conversation with James H. Gellert, Chairman & CEO of RapidRatings

For the second issue of Risk & Resilience Magazine, we sat down with James Gellert, Chairman & CEO of RapidRatings. RapidRatings is a SaaS technology company providing financial health ratings on public and private companies globally.

Thanks for sitting down with us, James. To begin, can you explain how your financial ratings or assessments differ from a credit report?

Traditional credit reports focus on a company’s ability to pay its bills… which is a very limited perspective of a company, and financial health ratings go significantly deeper. Financial statements of companies look deeply at longer- and shorter-term aspects of the business, how well-positioned is it to compete against its peers? How resilient is it? What kind of working capital and cost structure efficiencies does it have? How well is it able to generate returns on its asset size and on its sales volumes- things like that, as well as its shorter-term risks from a default perspective. All of that creates a set of lenses into a company that gives a much more dynamic perspective on risk and opportunity than a credit report.

One key element in supply chain risk is understanding suppliers’ ability to grow with you as well as avoiding the pitfalls where a weakness in a supplier can cause disruption or reputation risk, or some other degradation of a risk category. Credit reports just don’t give that kind of insight.

What’s the connection between financial risks and other risk areas?

Financial risk is an underpinning of a company’s ability to be resilient in the variety of risk areas that supply chain risk managers have to focus on; things like quality of product, timing of delivery, their research and development, commitment, their product development timeline, as well as risk areas like compliance, ESG, and cybersecurity. Financial is intertwined into all of these other areas and in a supply-chain context, it’s a leading indicator of whether companies are going to be a good partner or may have problems. The earlier you can identify those problems and collaborate with the private company or their supplier, the better off you’re going to be able to manage risk and continue to work with them. It’s not just about trying to eliminate weak suppliers. It’s about trying to lean in with the suppliers that you have a reason and desire to work with on a longer-term basis.

How has the pandemic shined a light on the importance of financial health ratings?

Financial ratings have always been important. Understanding the financial health of suppliers is something that should have been done for a long time, and the pandemic has only shined a brighter light on the need—understanding partners and how resilient they are, and how well they are able to invest in their own futures and be a strong partner going forward. The pandemic has also created more focus on supply chain risk at the board and C-suite levels, across organizations, and among shareholders. Ultimately that means that supply chain organizations have to do more risk management and financial assessments of their suppliers than ever before because there’s more scrutiny.

Have you seen an uptick in requests for due diligence for third parties based on the pandemic?

The consistent theme across clients of ours in different industries, financial institutions, and non-financial institutions has been an increased focus on their current and potential suppliers. And why is that? In the past, there’s been a trend towards lean manufacturing, just-in-time manufacturing, and a consolidation of business with suppliers. There’s more sole-source supply and the pandemic has demonstrated that there’s a major flaw to that plan. If your sole-source suppliers are experiencing disruption you’re in a lot of trouble. More companies are looking to evaluate redundancy in their supply chains and are going to add more dual sources, where before they might’ve been content working with one major supplier in an area of criticality… more diversification in supply chains means more suppliers to evaluate and a greater need to have an automated and predictive analytics toolset around doing all of that.

Do you have any best practices you can share for those that are looking to manage programs through challenging times?

Today, any best practices are about data cleanliness and consistent identification and evaluation of suppliers. We see lots of companies that are still early in their journey towards digitalization and creating clean data inside of their organizations. That goes right down to things like: can you provide a clean contact list of all of your suppliers, or can you determine which suppliers are most critical as measured by two or three different lenses of criticality? Companies have to be able to do these things in order to manage risk because you have to know who your suppliers are and you have to be able to contact them.

You also have to understand who your suppliers are and internally embrace the idea of collaboration with them because collaboration leads to transparency and transparency leads to better business relationships. As long as you are looking to understand them better through financial evaluations, cyber security evaluations, and ESG compliance, you need more information from them. If they don’t trust you, they don’t want to provide the information. But if they trust you and believe that there’s a commercial benefit to the transparency, they’ll provide it. We see the most successful and sophisticated programs embracing the ideas of collaboration and trust and being able to work more closely with our suppliers so that both sides benefit.

About the Contributor:

James H. Gellert is the Chairman and CEO of RapidRatings International. Previously, he was the Managing Partner of Howland Partners, LLC, and Howland Securities LLC—firms that provided consulting, business development, capital raising, and M&A advisory to companies in the financial information and technology markets. Prior to those positions, he served as CEO of a number of technology companies including wireless software and research companies SkyScout and Unstrung.

James is the President of Young Audiences/Arts for Learning Inc, the nation’s leading source of arts-in-education services. His views are frequently sought by major media outlets as well as federal regulators and the United States Congress.

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