White paper executive summary
 

Introduction

Since the credit crunch, thousands of businesses have been placed into administration or liquidation, including prestigious brand names such as Woolworths and Kodak. The economic impact of one high profile business failure can have a devastating impact on the businesses, large and small, that provide goods and services within the associated supply chain.
 

The challenge for businesses

The complexity of modern supply chains, based around the world and subject to different regulatory and reporting requirements can hinder the ability of businesses to fully assess the risk associated with customer or supplier failure. A principal challenge for any company is to ensure it can mitigate risk in doing business: both with those it contracts with directly and throughout the broader supply chain. A survey by the Business Continuity Institute found almost 40% of reported supply chain disruptions originated with Tier 2 and 3 suppliers*.

Companies implement a range of techniques to mitigate the consequences of an unanticipated failure within their supply chain but there are clear benefits from being able to anticipate and avoid a potential disruption before it happens.
 

The information age

In the digital age more information is available than ever before and access to much of this information is free. But information does not necessarily offer insight. Traditional sources of information used to monitor supply chain risks include credit ratings and ad hoc internet searches: whilst these methods have value, they can fail if overly reliant upon historic data or if the critical insight is missed because it was buried within a larger volume of noise.

LexisNexis and State of Flux have a joint research project to investigate how news and trade press sources could be monitored by companies looking to better monitor and anticipate financial risk in their supply chains.
 

LexisNexis’ proprietary SmartIndexing Technology

SmartIndexing automatically categorises documents according to a numerical score reflecting the amount of discussion of a subject in a document. Smartindexing has been applied by LexisNexis to news, business, legislative and legal content.
 

Applying insight to supply chain risk

LexisNexis and State of Flux have conducted a case study-based research project looking at 23 failed companies since 2008. The research analyses more than 90,000 news articles written about the companies in the run up to bankruptcy and uses specific Smartindexing terms to identify trends in companies that are at risk of failure.

Using this methodology, LexisNexis and State of Flux were able to identify early warning signs of risk in more than 80% of the sample companies researched. In more than half of the companies researched, the early warning signs were either ‘strong’ or ‘very strong’. Warning signs could be clearly seen six months before companies reached bankruptcy and these signs became more pronounced the closer the companies got to failure. Critically, the pattern of early warning signs was unique to failing companies and not seen in a sample of healthy companies, providing confidence that the methodology would not generate significant issues around false alerts.
 

What this means for mitigating risk

When applied to the management of future risk, the LexisNexis/State of Flux methodology provides insight for companies on the financial state of their suppliers and customers by the ongoing monitoring of highly relevant and focussed news and content, against relevant terms. This enables supply chain managers and account managers to identify, in advance of a business failing, key indicators that suggest suppliers and customers are at risk.

New companies can be added to the content monitoring platform as they emerge, either as a new customer or supplier or as their importance to the business increases.

LexisNexis and State of Flux have jointly prepared a white paper, outlining the methodology behind this research and its implications for identifying business risk in a timely manner.
 

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