What Silicon Valley Bank Failure means for Procurement Teams
Lessons learnt from more bank failures on supply chain risk management
Procurement teams are increasingly becoming the stalwart of risk management regarding supply chain risks within their businesses. But this is on the back of poor risk management since the inception of procurement, with due diligence of suppliers at times overlooked, and poor contract management (both pre and post-signature) the staples of what procurement has looked like for so long.
Covid changed this for some. When suppliers started punching back at the hammer, procurement wielded as they faced requests to reduce prices repeatedly. They took their supplies to their customers of choice. Some teams were left with a supply chain crumbling around them with no security of supply.
What do we have now?
Commodities and raw materials are priced higher than ever.
Energy prices in some parts of the world that rely on energy imports are higher than ever.
Sustainability and ESG drives that are pushing up pricing in places.
Runaway inflation.
Increasingly high-interest rates compared with the record lows of recent years that are adding financial pressure onto loans.
Company collapses that are affecting points across the supply chain.
Now Silicon Valley Bank - a bastion of banking for the tech innovators and VC-Backed businesses profiting so much from the Covid pandemic.
I can remember the crisis unfolding as I was at school around Northern Rock with people queueing at the branch to take out all of their money. This was a pre-digital bank run. The bank run and eventual collapse didn’t impact individuals only.
In the US, 170,000 small businesses closed during 2007-2008.
28000 UK small businesses were insolvent by the end of 2009. This was around 280 businesses shutting up shop.
I’m not saying that this was the result of the banking sector facing collapse in the UK in isolation.
And I’m not saying this will happen on the back of SVB collapse (especially as the acquisition of SVB UK by HSBC has protected the UK tech sector for now)
Instead - it raises concerns that we in procurement should look to solve issues of financial fragility in the supply chain with its suppliers.
Because one of these “small businesses” could be one of your strategic suppliers.
SVB - Concerns that Procurement should review
Your Tier 1/Strategic Suppliers, as per your supplier segmentation model, need a constant watch. You should have data on these suppliers as to where they bank. Do they use SVB? If so, consider reaching out and asking how they are getting along here.
But you should consider who they bank with - and how stable they are should interest rates continue to rise.
“The nutshell is that rising interest rates lowered the value of securities that SVB owned and led to some depositors withdrawing cash, and when the bank tried to raise more capital, Silicon Valley panicked and effected a bank run”. - Source, Max Read
This isn’t the first time and won’t be the last.
I would like to know if this comes into play in any procurement team when evaluating business continuity. And the better question to ask procurement teams might be:
Are you reviewing and evaluating your suppliers’ business continuity plans and making your insights based on the other data you are collecting and reviewing?
So ensure your supplier has the funds to continue operating and can pay their suppliers on time. Some businesses operate as system integrators (SI), especially in tech. An SI combines multiple suppliers’ systems and overlays their expertise, code, and process to create their products.
Some of the products they integrate will be from other SIs. This could create a complex web of suppliers and software and create a basket of criticality.
It might only take one supplier to fall within this complex web for your product to stop working.
Supply chain visibility of who you are working with is vital.
As is the financial stability of your suppliers. You must monitor this and ensure you are alerted should anything look “off”.
Procurement must vet its suppliers better than ever before, especially its most strategic ones.
Payment Terms could be a lifeline for suppliers that are struggling. You may be paying your suppliers quarterly on> 30-day terms. With transparency from your supplier on their burn and revenue rate, a reduction could keep them afloat. Especially if other customers mirror this. This isn’t an SVB thing - this could be valuable at any time of economic hardship.
Overall, procurement should take note of what is unfolding and work out how it can stop supply chain failures from occurring.