Supplier Evaluation Risk Rating: Applications and Benefits

Key factors impacting your rating and what to do

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A Dun & Bradstreet supplier evaluation risk rating (SER) is a score which predicts the probability that a company will cease its operations in the next 1 year (12 months). This is a very important score since it gives you a hint about the status of suppliers that you are currently working with and if they will be in active operations over the next year. It also gives your creditors a clue on whether your business will be able to be paid by the supplier or not.

The SER rating can be viewed by looking at the Dun & Bradstreet financial stress score which is derived from a statistical model. The model is generated using the existing data files for a particular supplying company. The major component for determining the supplier risk rating is the financial stress score for the business. However, there are also other secondary elements that are also considered in coming with SER.

The supplier evaluation risk rating is divided into 9 distinct groups with 1 being given to businesses with the lowest probability failure ( low likelihood of failure) and 9 representing businesses with the highest risk (high likelihood of failure). To the customers who would like to be supplied goods with a particular supplier, this score is very important since it reveals whether the supplier is reliable or not. So if you have a company that deals with supplying goods, it is good to ensure that your business has a low supplier failure probability in order to attract potential customers.

On the other hand, as a client looking for suppliers, it is good to choose a supplier with a low probability of failure.

Factors Considered When Determining the Supplier Evaluation Risk Rating

D&B takes into account different factors when determining the SER for a particular supplier. These factors include:

1. General Information About the Supplier

Dun & Bradstreet takes into consideration the general information about the supplier. This information includes; the ownership of the supplier's facilities, the total number of employees in the company, the financial position of the company, the number of years the company has been in business, the type of company and the region where the company is located.

2. Public Information About the Company

The information that the public has about the supplier is also taken into account when determining the SER. This type of information is related to the number of judgments, lawsuits and bankruptcies, the history indicator of the supplier, the number of UCC filings and business deterioration.

3. The Financial Information About the Company

The Supplier evaluation risk rating is also determined by how well the supplier's company is doing financially. Some of the financial statements used are profit and loss statements, balance sheets, quick ratio, current ratio, total assets of the company, the current liabilities that the company has, the net profits accrued by the company after taxes, the net worth of the company as well as the company's previous financial statements.

4. Payment Experiences

What constitutes payment experiences include the company's most recent PAYDEX, the variance of PAYDEX, the total number of payment experiences, the percent of total number of satisfactory payment experiences, the dollar total amount of negative payment experiences ( days past due categories i.e 31-60, 61-90 and more than 90 and so on) among other factors.

When all the above factors are fed into a stochastic model, the supplier's SER is determined ranging between 1 and 9 with the former meaning that the company has a low supply failure while the latter implying that the company might fail to meet the supplying demands of its clients in the next year.

Applications of Supplier Evaluation Risk Score

The SER is currently a very useful figure to both suppliers and clients. A supplier with a low supply failure rating is very advantageous compared to one with a very high SER.

Below is a quick look at the benefits that SER has to both suppliers and their clients.

Benefits of Low SER to Suppliers

Every supplier should work hard and ensure that their SER is as low as possible. This is because of the following:

  • Landing New Contracts - If D&B has rated your company with a low-risk factor, it actually means that many potential clients may want to start a business relationship with you. This is attributed to the fact that the probability for your company in failing to supply goods is close to zero. Which client wouldn't want to work with such a supplier? Thus, having low SER will enable new clients to reach out to you and form a long term partnership with you as their supplier.
  • Keeping Existing Clients - Business is a realistic thing and everything seen by potential and existing clients is always considered real. Therefore, it is good for any supplier to maintain a low supply failure rating as determined by Dun & Bradstreet. When your clients see that all is well in your company, they won't see any need to look for any other supplier.
  • Increase in Income - When your business gets new clients, it actually means that you will be needing to increase your supply rate which will automatically attract new payments leading to an increase in income. When your company has increased income, you are going to enjoy the scale up in your supply chain.

How to Improve your SER as a supplier

1. Make Prompt Payments

Did you know that the way you make payments to your creditors affects the SER for your business? The higher SER that your company has could have been contributed by late payments. Therefore, it is good to pay all your bills on time. In fact, it is advisable to make all payments ahead of schedule. On the other hand, ensure that you run several accounts for your company since it shows that you are in a financially stable position.

2. Maintain a Stable Financial Position

As earlier highlighted, it is good to ensure that your company has a strong balance sheet. This is because a supplier who is financially stable is considered less of a risk by potential clients as well as creditors. The higher the financial stability, the lower the probability of default in supply of goods.

3. Clean Your Public Records

In order to raise your SER rating, you must work very hard to stay away from lawsuits, judgments and liens. If you have any issue with a creditor, engage them in dialogue and agree on better terms to settle any dispute. This is because lawsuits, liens and judgments can impact negatively on your SER score.

4. Avoid Changing Information About Your Company too Often

If you change the management, the employees and internal issues of the company every now and then, D&B will assume that you are a struggling company in terms of finance or administration. This will automatically lower the SER score for your company.

Other ways on how you may impact the Supplier Evaluation Risk Rating include keeping all the credit reports about your company updated, paying all invoices prior to the due date and adding trade references to your D&B file by using CreditBuilder from D&B.

Benefits of SER Score To Clients

  • Avoid Supply Chain Risk - Clients no longer have to worry about supply default cases from suppliers. This is because any client can access and assess the SER rating for any supplier they want to work with. Thus, they have the freedom to choose a supplier with a low SER score to minimize the risk of establishing a relationship with a supplier who can't meet its supply needs.
  • Building Good Relationship With Right Suppliers - Dun & Bradstreet will help you identify suppliers that are viable and will be around for a long time by simply checking the SER score. Choose a supplier with a low SER and build a good relationship with and phase out those with high SER scores.
  • Find New Suppliers - The D&B database will make it easy for you to establish new potential suppliers that have low SER ratings. Get them into your supply chain and work towards creating a good working partnership.
  • Potential Supplier Risk Alert - D&B always red flags suppliers who are at risk of closing their businesses. This helps clients to avoid establishing any relationship with them.