The combined forces of the COVID-19 pandemic, global unrest, supply chain disruption, inflation, labor shortages, climate change, and other factors are taking a toll on the defense metal fabrication industry. Those who supply materials and services to metal fabricators may also be struggling, creating a ripple effect that impacts others down the line.
All of these industry challenges can have a major impact on a company’s financial status. A company that had a firm financial footing a couple years ago may no longer be able to make that claim if they weren’t able to pivot or adapt to changing times.
Defense contractors should routinely evaluate the financial condition of their suppliers to help ensure projects are completed on time, to specifications, and within budget. With defense projects potentially costing millions of dollars, evaluating supplier financial stability is a top priority when considering metal fabricator qualifications.
Tips for Assessing Supplier Financial Stability
When vetting a precision metal fabrication company, a defense contractor’s finance team will typically do background checks and review Dun & Bradstreet (D&B) scores to evaluate their creditworthiness.
They may also look at other financial considerations, including:
- Annual Revenue — A look at a company’s current and historical annual revenue can indicate their growth and financial strength.
- Third-Party Financial Rating — Moody's, Standard & Poor's (S&P), and Fitch Ratings may provide financial insights in addition to D&B.
- Legal Searches — Are there any judgements or liens on the company due to defaults on loans?
- Debarment Search — Check whether a company has been excluded from federal government contracting and subcontracting due to failure to perform or poor performance.
- Financial References — In addition to references indicating a metal fabrication company’s level of expertise and craftsmanship, ask for financial references.
- Merger and Acquisition Activity — Has the company merged or been acquired by a more financially secure company, or have they bought other companies? Such activity may indicate financial strength and growth.
- Company Structure — Is the company’s customer base diversified, or is it heavily dependent on a single customer for its primary revenue? If so, what happens if they suddenly lose that customer?
A defense metal fabrication company’s reputation may only be as reliable as its subcontractors and supply chain. So, be sure to inquire about their methods for qualifying their own vendors.
Warning Signs of a Company’s Financial Instability
There are obvious indicators that a company is having financial problems, not the least of which is a sudden ceasing of operations. However, there are typically many warning signs to watch for in advance of such a serious incident.
- Poor Responsiveness — Changes in behavior or lack of transparency from a once-responsive company could be a red flag. Contacts at a financially strained company may become withdrawn and be slow to respond to inquiries or questions.
- Staff Reductions — High turnover rates or upper-level managers who’ve been with the company for years who suddenly leave could be signs of major issues going on behind the scenes.
- State Notifications — If a supplier is delinquent on their taxes, a state government agency may notify the supplier’s customers and require that any invoice payments be made directly to the agency instead.
- Downplaying Issues — Owners of a financially strained company may downplay issues, blame an accounting error, or claim their CPA is dealing with a situation.
- Not Meeting Payroll — In dire cases, workers may simply walk off the job because a company can’t make payroll.
- Shift in Quality or On-Time Delivery — When cash flow becomes an issue and a company can’t pay its creditors, it will become more difficult to procure materials, leading to missed deadlines or a reduction in quote requests. As skilled workers make an exodus, there will undoubtedly be more rework and a reduction in quality.
Supplier Scorecards & Best Practices
Most reputable metal fabrication companies will have supplier scorecards that help to evaluate their vendors and their own performance, including quarterly review meetings to regularly assess any emerging issues. Scorecards will evaluate on-time delivery, rework, sales volumes, review of corrective actions, and other metal fabrication KPIs.
Defense contractors typically include clauses in their contracts requiring notification of any significant business developments, including high-level leadership changes, payment term modifications, acquisitions or mergers, or a shift in core business focus (e.g., reducing welding force by 50% to focus on machining). They may also request information on a company’s disaster recovery or business continuity plans.
It’s not unusual for a financially secure metal fabricator to establish milestone billing agreements to cover completed work or material procurement. If the company needs to purchase $500,000 worth of raw materials, for example, they’ll likely invoice that portion when the order is placed to help them maintain a healthy cash flow.
Benefits of Supplier Financial Stability
The value of financial stability goes beyond simply having peace of mind that a company will be there to provide services or products. When financially secure, a company typically has a more dedicated workforce who will put extra care and pride into their work. They’ll be less likely to cut corners and may even go above and beyond the scope of work to ensure satisfaction.
A company that isn’t financially secure may issue low-ball bids or take on work that they might not be fully qualified for simply because they need more contracts to stay afloat. But an organization that is smart with their finances will have the resources and people they need to carefully discern what projects are a “right fit” and understand the scope of work and their ability to deliver results.
At Fox Valley Metal-Tech, we are dedicated to transparency among our customers and suppliers. We welcome your questions and inquiries. Reach out to our long-tenured team of experts today. Also download our helpful RFQ checklist below.
