Caveat Emptor

A weak economy can mean more than just slumping sales. It could also signal that serious supply problems are ahead.

As consumers purchase fewer goods, most stores have to cut back their orders from manufacturers and suppliers. As a result, many suppliers, particularly foreign ones, may soon be in financial trouble — or out of business.

Studies by New York-based Panjiva show that the number of foreign companies that are shipping products to the United States declined 10 percent between January 2009 and February 2009, and those that are shipping are sending considerably fewer goods. Panjiva found that 29 percent of "significant" foreign manufacturers (those that send 10 or more shipments a year to the United States) have seen shipment drop-offs of 50 percent or more over the past year.

The ramification for retailers is uncertainty over product availability and supply chain stability, according to Panjiva CEO Josh Green.

"Many foreign companies are teetering on the edge of insolvency," he says. "This poses significant risk for U.S. retailers," and the situation is not likely to get better anytime soon.

While retailers can track U.S. suppliers through regulatory filings and information from sources like Dunn & Bradstreet, such information is not always available about foreign firms. "Most of these companies are not publicly traded, so the information is not easily accessible," Green says. "Most retailers rely on credit information supplied by the vendor itself, and this is not always accurate."

As part of its Panjiva Alerts services, the company publishes a watch list of suppliers whose shipments have declined significantly, and can also help companies find healthy new suppliers. It follows international suppliers via shipment tracking, which it views as a reliable way to identify potential problems.

Its proprietary technology allows Panjiva to process huge amounts of data for about 500,000 different companies across multiple industries. "During any given month, we track at least 100,000 different suppliers," Green says.

To assess aggregate risk in the global supply chain, Panjiva analyzes waterborne shipments to U.S. customers, tracking manufacturers that are serving the American market. For each manufacturer, Panjiva tracks changes in volume over time. The results of the analyses are released on a monthly basis.

Losing a key supplier
Not knowing whether a particular supplier is in trouble can have immediate and long-term consequences for a retailer. In the short run, a retailer that receives significant sales from a particular product could be devastated if that product's supplier becomes insolvent. "It takes a lot of time and money to change suppliers if there is a sudden disruption," Green says. "If this is a successful product, you will have a lot of disappointed customers if you lose a key supplier."

Down the line, there could be concerns that "when the demand for retail products does pick up, there won't be enough suppliers remaining to [handle] the additional workload."

According to Green, nearly half (47 percent) of U.S. buyers are doing business with companies that have been listed on Panjiva's watch list in the last six months; more than one-third (38 percent) have accepted shipments from a watched company within the past three months.

"Many of these buyers may not even be aware of the risk they're facing with suppliers," Green says, adding that the problem isn't confined to Asia. "It may be more significant in China, but that is only because so much of retailers' supply base today is out of China."