Companies are credit-checking their customers and suppliers much more closely, said a survey
Over three-quarters of senior executives at Europe’s life science companies identified cash flow as the biggest threat to their long-term success, said a survey.
The research revealed that life science companies are not immune to the effects of the downturn. With supply chains and credit terms tightening several of the companies were concerned about the solvency of their customers and suppliers.
Around a third of the respondents said they were credit-checking their customers more carefully and analysing suppliers’ financial health.
New regulation could be adding to the problems, warned Christopher Bruce, of Marsh’s life sciences practice, authors of the research. ‘Regulation can make these complex supply chains more fragile.’
The downturn has also led the life sciences companies to review their attitude to risk. Sixty-five percent of the companies said risk management is now more important at senior levels and 38% expect their risk management budgets to increase.
Senior risk and insurance professionals in 86 firms across Europe were interviewed as part of the survey.
Marsh recommends the following actions:
Understand the pressure points in your supply chain: Supply chains are an extremely potent source of risk and they have to be mapped to be fully understood. Doing this allows pressure points to be identified â€“ the points at which the supply chain is most vulnerable to changes in external forces. These pressure points can be financial, operational or regulatory.
Draw up contingency plans relating to the pressure points: Mapping the supply chain and identifying the pressure points enables companies to calculate the potential financial consequences of various events and draw up business continuity plans to meet them. Once plans are drawn up, training is needed to ensure that everyone knows how to put them into practice, and the whole procedure needs to be tested to make sure that it works.
Improve cashflow by understanding the cost of risk: One of the major costs for organisations in this sector is the financing of risk. A robust approach is required to reduce the cost of risk, which begins with identifying and evaluating risks, followed by designing a risk-financing programme that combines risk retention and transfer. A structured approach is imperative for any company dealing with cashflow pressures and needing to ensure that the costs it incurs are consistent with its appetite for risk and its ability to retain or finance risk. Time invested in understanding the cost of risk and the factors that can be controlled could significantly ease the pressure on cashflow.