1.

Financial condition
a. Financial stability.
- Often used as screening process in initial selection phase
+ When a company is looking for a supplier, they often check the
financial status of the supplier to ensure that they have the
ability to provide goods/services in a long-term and stable
manner.

+ This helps to avoid risks from suppliers with poor financial

status.

- Risks of financially weak supplier

+ Supplier will go out of business : If a supplier does not have
sufficient financial resources to cover operating costs, labor, or
to settle debts, they may cease production and declare
bankruptcy.

+ Insufficient resources to invest in improved plant and

equipment : A financially weak supplier may lack the funds to
upgrade infrastructure, leading to an inability to improve product
quality or maintain efficient production processes, resulting in
deteriorating product/service quality over time.

+ Supplier may become too financially dependent on buyer:

This occurs when a significant portion of the supplier's revenue
comes from one or a few buyers, rather than having a diverse
customer base.
➢ Operational risk: If the buyer decides to terminate the
contract or reduce order volumes, the supplier may face
significant operational risks. The lack of stable income
from key customers can lead to financial difficulties or
even closure.
 ➢ Quality of service and products: ependence on a single
buyer can lead to a lack of diversification and innovation
in products/services, as the supplier may focus too much
on the needs of that buyer while neglecting broader
market demands.

+ May be indicator of other problems :A financially weak

supplier may signal other issues such as poor management,
inefficient use of assets and production processes, or weak
solvency.

- Pick a third party together that would evaluate and give the highlights
of supplier’s financial situation.

+ To gain an objective and accurate view of the supplier's financial

health, the company can engage a professional third party (such
as an auditing firm or financial consultant) to assess and
highlight key aspects of the supplier's financial strength.

➢ In the field of accounting and auditing, the Big 4 firms are

Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young
(E&Y), and Klynveld Peat Goerdeler (KPMG).

➔ EXAMPLE :
Takata Corporation, a major Japanese automotive parts supplier, was well-
known for manufacturing airbags but faced a severe financial crisis due to
issues related to its products.

In 2013, Takata began encountering significant problems when its airbags

were found to be potentially dangerous, leading to a massive global recall of
vehicles. These airbags had a risk of exploding with excessive force, causing
metal shards to fly into drivers and passengers, resulting in injuries and even
fatalities.

As a result, Takata faced numerous lawsuits, massive product recall costs,

and fines from regulatory agencies. These issues severely weakened the
company's financial situation.

("Takata is facing mounting debt due to the large costs of product recalls. The
company's stock is now nearly worthless," said Tatsuya Ikeda, a lawyer at
Adire Legal Professional Corporation in Tokyo. (1) In January, Takata agreed
to pay $1bn (£784m) in penalties in the US for concealing dangerous defects,
and pleaded guilty to a single criminal charge.The firm paid a $25m fine,
$125m to people injured by the airbags as well as $850m to carmakers that
used them.But it is facing further legal action in the US and liabilities of 1
trillion yen ($9bn) - including to 10 carmakers who used its airbags. (2) )

b. Financial ratio
★ Current ratio :

- The current ratio is a liquidity ratio that measures a company’s

ability to pay short-term obligations or those due within one year.
It tells investors and analysts how a company can maximize the
current assets on its balance sheet to satisfy its current debt and
other payables.

- Basic interpretation :
+ Above 1.0: A current ratio greater than 1.0 suggests a
business has more current assets than current liabilities.
This indicates the business should be able to cover its
short-term obligations without having to sell long-term
assets or raise additional capital.

+ Below 1.0: A current ratio below 1.0 indicates a business

has more current liabilities than current assets,
suggesting potential liquidity problems. This might raise
concerns about the business’s ability to meet its short-
term obligations, possibly leading to financial distress if
the situation persists.

★ Quick ratio :

- The Quick Ratio, also known as the Acid-test or Liquidity ratio,

measures the ability of a business to pay its short-term liabilities
by having assets that are readily convertible into cash.
 - Basic interpretation :
+ Quick ratio >1: the ability of the enterprise to pay short-
term debts immediately is high. In this situation, most
enterprises do not encounter problems in paying short-
term debts immediately.

+ Quick ratio <1: the ability of the enterprise to pay all

short-term debts in a short time is impossible. Or to be
more precise, the enterprise will encounter problems in
paying short-term debts quickly.

★ Inventory turnover :

- The Inventory Turnover Ratio measures the number of times

that a company replaced its inventory balance across a specific
time period.

- Basic interpretation :
+ A low inventory turnover ratio might be a sign of weak
sales or excessive inventory, also known as overstocking.

+ A high inventory turnover ratio, on the other hand,

suggests strong sales. Alternatively, it could be the result
of insufficient inventory.

★ Fixed asset turnover:

 - Fixed Asset Turnover (FAT) is an efficiency ratio that indicates
how well or efficiently a business uses fixed assets to generate
sales.

- Basic interpretation :
+ Fixed asset turnover ratios vary by industry and company
size. Instead, companies should evaluate the industry
average and their competitor's fixed asset turnover ratios

+ Low Ratio: When the business is underperforming in

sales and has a relatively high amount of investment in
fixed assets, the FAT ratio may be low.

+ High Ratio: A high ratio, on the other hand, is preferred

for most businesses. It indicates that there is greater
efficiency in regards to managing fixed assets; therefore,
it gives higher returns on asset investments.

★ Total asset turnover ratio :

- The asset turnover ratio, also known as the total asset turnover
ratio, measures the efficiency with which a company uses its
assets to produce sales.

- Basic interpretation :
+ The ratio measures the efficiency of how well a company
uses assets to produce sales. A higher ratio is favorable,
as it indicates a more efficient use of assets. Conversely,
 a lower ratio indicates the company is not using its assets
as efficiently.

+ The asset turnover ratio can vary greatly depending on

the industry.

★ Days sales outstanding :

- Days Sales Outstanding (DSO) represents the average number

of days it takes credit sales to be converted into cash or how
long it takes a company to collect its account receivables.

- Basic interpretation:
+ Lower Days Sales Outstanding (DSO)➝ A low DSO
implies the company can convert credit sales into
cash relatively quickly, and the duration that
receivables remain outstanding on the balance
sheet before collection is shorter.

+ Higher Days Sales Outstanding (DSO) ➝ But a

higher DSO indicates the company is unable to
quickly convert credit sales into cash, and the
longer the receivables remain outstanding (and
less liquidity the company has).

+ A good DSO for a business varies by industry but

typically falls within a range of 30 to 60 days (4)

★ Net profit margin :

 - Net Profit Margin is a financial ratio used to calculate the
percentage of profit a company produces from its total revenue.

- What a “good” net profit margin is will vary considerably by the

industry. As a general rule of thumb, net margins in excess of
10% are considered to be healthy (3)

★ Return on assets :

- The Return on Assets (ROA) is a profitability ratio that reflects

the efficiency at which a company utilizes its total assets to
generate more net earnings, expressed as a percentage.

- For the return on assets (ROA) metric to be useful in

comparisons, the companies must be in the same (or similar)
sector, as industry averages vary significantly.

★ Return on equity :
 - Return on equity (ROE) is a financial ratio that indicates how
efficiently a business generates profit from its shareholders’
equity

- High Return on Equity (ROE): The higher the ROE ratio, the
more the company gains in net profits with the proceeds
provided by equity investors.

- Low Return on Equity (ROE): The lower the ROE ratio, the less
the company is earning in net profits with the proceeds
contributed by equity investors.

★ Debt - to - equity ratio:

- The ratio measures the level of debt the company takes on to

finance its operations, against the level of capital, or equity,
that's available.

- Basic interpretation :

+ High DE Ratio (>1): A high DE ratio is a sign of high risk.

It means that the company is using more borrowing to
finance its operations because the company lacks in
finances.

+ Low DE Ratio (<1): the company’s shareholder’s equity is

in excess and it does not need to tap its debts to finance
its operations and business. The company has more of
owned capital than borrowed capital and this speaks
highly of the company.

★ Current debt to equity ratio:

 - Current Debt to Equity Ratio measures the extent to which a
company relies on short-term debt (current debt) compared to its
equity.

- Basic interpretation:
+ High ratio (>1): The company is relying heavily on short-
term debt compared to equity, which may pose financial
risks if it lacks sufficient cash flow to repay debts on time.

+ Low ratio (<1): The company primarily funds its

operations with equity rather than short-term debt,
indicating a stronger financial position.

+ Varies by industry, but generally, keeping the ratio at a

reasonable level helps avoid financial strain.

★ Interest coverage ratio :

- The Interest Coverage Ratio measures a company’s ability to

meet required interest expense payments related to its
outstanding debt obligations on time.

- Higher Leverage Ratio→ Higher leverage ratios equate

to more financial risk, meaning the borrower’s
probability of defaulting on its required debt payments
becomes more of a concern.

- Higher Interest Coverage Ratio → For interest coverage

ratios, however, the lower the figure, the riskier the
credit health of the borrower – which is the opposite of
leverage ratios.
 - It depends on the company and the industry it operates in

c. Example for Weichai’s finance

 Formula 31/12/2023 Industrial Financial assessment
Machinery and
Components
Industry
(average of 4
quarters)
Current ratio 1.35 The current assets of the
= Current asset / consolidated company are
current liability sufficient to satisfy Weichai
current liabilities.
Quick ratios 0.8 0.49 The ratio is above 1, indicating
= (Current asset - (link) that Weichai has sufficient
Inventory) / current current assets to cover its short-
liability term liabilities. However, it is not
excessively high, suggesting that
the company is not holding too
much idle current assets.
Inventory turnover 4.45 3.505 Weichai manages inventory more
= COGS / Inventory (link) efficiently than the industry
average (3.505). This indicates
that the company sells and
replaces inventory faster,
reducing the risk of overstocking
and obsolescence.
Fix asset turnover 4.85
= Sales / Fixed asset
Total Asset 0.64 0.685 The ratio is lower than the
turnover (link) industry average (0.685),
= Net sales / Total indicating that Weichai may not
Asset be using its total assets as
efficiently as its peers to
generate revenue
Days out standing 40.523 30-60 days This indicates effective
= (Acc Receivabe x (link) receivables management and no
365) / Sales significant issues in collecting
payments from customers.
Net Profit Margin 5.2% 12.3% The conversion from revenue to
= Net income / Net (link) profit is not effective, possibly
sales due to high production costs and
lower selling prices than other
competitors in the same industry.
Return on Asset 3.35% 7.855% Weichai's ROA is lower than the
= Net income / Total (link) industry average (7.855%),
Asset indicating less efficient use of
assets to generate profit. This is
due to poor asset management
and not fully optimizing
productivity.
Return on Equity 10% 20.6% Weichai's ROE is lower than the
= Net income / Total (link) industry average (20.6%),
Equity indicating lower profitability
relative to shareholders' equity.
This could be due to higher debt
levels used to finance operations.
Debt to Equity 1.96 0.6775 Weichai's debt-to-equity ratio is
= Total Debt / Total (link) significantly higher than the
equity industry average (0.6775),
indicating that the company relies
more on debt to finance its
operations. This increases
2. Process and technological capability
- Technological and Process Capability: is the supplier’s ability to use
technology, designs, methods and equipment to manufacture products
or provide services. This includes assessing the state of the art of the
technology the supplier is using.

a. Level of technology, design, methods, and equipment used to

manufacture products or deliver services.
- Comparison of current vs. future capabilities: Is the supplier
using advanced technology, or are they still relying on outdated
processes? Do they have plans to upgrade their equipment?

- Capital expenditure plans: Does the supplier invest in

machinery, automation, or digitalization to improve efficiency?
This impacts product quality

b. Resources Committed to R&D (Research and Development)

- Does the supplier invest in research and development to
improve products or processes?

- A supplier with strong R&D capabilities can help businesses

develop new products, optimize costs, and enhance the supply
chain.

c. Supplier Design Capabilities

- Can the supplier independently design products, or do they only
manufacture according to given specifications?

- If they have a strong design team, businesses can collaborate

with them to develop customized products.
d. Electronic Data Exchange Between Two Businesses
- CAD (Computer-Aided Design) : This is a tool that supports
the design and drawing of technical drawings on the computer,
especially mechanical drawings. CAD allows the creation of 2D,
3D models of physical components and printing the designs on
a page to carry out the next steps for the manufacturing
process. It also allows the use of simulation and analysis of the
model's movement in 3D space.

- RFID – ratio frequency identification

- ASN – advance shipping notification
- EFT – ELECTRONIC FUNDS TRANSFER

3. Information system capability

a. Web-based B2B vs. EDI systems
- Web-based B2B : Suppliers can use electronic portals or online
platforms to transact with businesses.

- EDI systems (Electronic Data Interchange) : is a private

system that automatically exchanges business documents
between organizations. Daily business workflows require the
exchange of documents such as invoices, purchase orders, and
shipping forms or shipping statuses.
b. CAD/CAM capability
- CAD capability :
+ Purpose: CAD systems are designed for design and modeling.
They are used to create detailed computer models and product
drawings.

+ Functions: They include 2D drafting, 3D modeling, structural

analysis, and documentation. CAD systems provide tools for
visualizing, verifying, and modifying designs before production
begins.

- CAM capability :
+ Purpose: CAM systems are designed to manage manufacturing
equipment and automate manufacturing processes, using
design data from CAD systems.

+ Functions: They include creating control programs for CNC

(Computer Numerical Control) machines, robots, and other
manufacturing equipment. CAM systems translate CAD models
into machine code that machines can use to make actual parts.

c. Bar coding or RFID

(https://www.youtube.com/watch?v=PQVhqdZhueM)
- RFID stands for Radio Frequency Identification, which is a technology
that identifies objects using radio waves. RFID technology allows users
to identify objects through a radio wave transmitting and receiving
system, supporting the fastest, most efficient and accurate
management.

- By applying RFID technology, businesses can easily track the entire

“life cycle” of a product, from input materials to output products. From
there, businesses can control quality, trace the origin as well as
determine the status of shipments in a simpler and more convenient
 way. Through the application of RFID technology in Logistics,
information about goods is publicly disclosed in detail and transparently
between manufacturers, suppliers, shipping units, retailers, etc.,
helping to enhance coordination and at the same time help streamline
effective warehouse management processes.

d. VMI (SMI- Supplier Managed Inventory).

- VMI, also known as supplier-managed inventory from a
customer’s point of view, is a data-driven initiative where
suppliers manage the inventory levels of their own products,
components, or materials at the on-site location of the vendor or
distributor. This helps to reduce both shortages and surpluses.
By shifting inventory management responsibilities in this way,
supply chains can run leaner and more efficiently – reducing
overheads and improving supply chain responsiveness and
agility.

e. ASNs and EFT transfers

- ASN – advance shipping notification : is a document that provides
detailed information about a pending delivery.
 + Speed and efficiency: ASNs allow for faster processing of
shipments, ensuring that recipients are prepared for the
incoming goods, leading to quicker unloading and warehousing.

+ Enhanced communication: With the use of ASNs, suppliers and

customers maintain open lines of communication. The buyer is
always informed about what to expect and when, leading to
smoother operations.

- ELECTRONIC FUNDS TRANSFER - EFT

+ Electronic funds transfer (EFT), is a digital financial transaction
method facilitating swift, secure money exchanges between
different accounts.

4. Developing a supplier evaluation and selection survey

- Comprehensive and include important performance categories

- As objective as possible
- Include items and measurement scales that are reliable
- Flexible
- Mathematically straightforward and simple to understand