Moody's: The Return of Value at Risk in Supplier Monitoring

In an era of exponential risk where supply chain disruptions have become the norm, businesses are turning to a familiar strategy to build resilience while remaining cost-effective.

Enter 'Value at Risk', a concept borrowed from finance that is now emerging as a key strategy to help procurement and supply chain professionals prioritise risks and assess the financial impact of risk mitigation strategies. 

Here, Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody’s Analytics, explains the concept of Value at Risk and why it's regaining prominence in the supply chain space. 

Can you explain the concept of Value at Risk and its origins?

Financial risk is the single biggest predictor of supplier performance. You need your suppliers to do what they are committed to delivering. If you know which of your suppliers is weak financially, you know who is at risk of poor performance, at least in the near term. 

Value at Risk (VaR) is a financial indicator that estimates potential revenue (or profit) loss from a supply chain disruption. 

So, for example, you may have 1,000 suppliers and today, on your risk management dashboard, you have 50 suppliers showing significant risk. Within that subset, you want to be able to focus on the risk that is applicable to the parts of the supply chain that drive most of your revenue. So, you may find that as few as five suppliers are actually driving 75% of your revenue risk. You can then focus on those parts of the supply chain, concentrating your efforts.

Why is Value at Risk regaining prominence and increasingly being applied in the supply chain space?

The pandemic was, of course, a major driver of supply chain risk, but there were other things going on even before COVID-19.

For example, there were significant increases in semiconductor prices. So, when the pandemic hit, there was a realisation that this reactive approach to managing risk in supply chains was no longer going to work. 

So, you have this change in risks, but at the same time the availability of risk data is now better than it’s ever been before. For example, at Moody’s, we have a massive amount of proprietary data. And in addition to the risk assessments, you also have improving enterprise data and you need both to calculate value at risk.

If you have both of those data components and they are now much more robust, your VaR calculation to guide your decision on where and how much to invest in mitigation.

Where specifically might Value at Risk be used in a supply chain context?

Tariffs are shaking up entire industries and causing big headaches for businesses, especially those that rely heavily on international suppliers. That’s because tariffs don’t just mean higher prices – they can also slow down production, create supply shortages and reduce demand for products. On top of that, there's the looming threat of retaliatory tariffs, government investigations or even consumer boycotts, all of which have the potential to hurt international trade even more.

The ripple effects can be brutal. Suppliers face higher costs, which they then try to pass on to buyers. That means businesses see shrinking profit margins and, in some cases, can lead to real financial trouble.

But it doesn’t stop there. When suppliers are under financial strain, it can spiral into all kinds of issues: unhappy employees, declining product quality, production delays and skyrocketing costs. And if budgets get too tight, compliance might slip through the cracks, which could lead to fines, penalties or reputational damage.

So, how are businesses responding? They’re getting creative and proactive. They’re monitoring suppliers more closely—checking financial health, risks and compliance to catch problems early. They’re renegotiating contracts to handle tariff-related costs and tweaking pricing models to stay transparent with customers while protecting their margins. Collaboration is another big focus—companies are working more closely with suppliers to tackle shared challenges and strengthen the entire supply chain.

Some businesses are also preparing for the unexpected. They’re running “what-if” scenarios to anticipate future tariff changes and creating contingency plans, like finding alternate supply routes or adjusting production. And, where it’s possible, they’re diversifying suppliers—though that’s easier said than done, with supplier development costs and execution risks majorly complicating things.

But there is a silver lining: disruption through tariffs can push companies to innovate and make better use of data-driven tools. For example, our customers use Moody’s supplier financial health assessments to determine how to fairly split tariffs costs with their suppliers. 

Do you expect to see continued uptake of Value at Risk as a strategy among supply chain leaders?

The risks are growing exponentially. In the US last and earlier this year, we’ve had to deal with the East and the West Coast port strikes. On top of that, you’ve got everything that happened in the Red Sea, not to mention a series of extreme weather events like wildfires in California that are impacting logistic growth.

So, there's more and more risk and it's going to put a burden on the people managing supply chains, and it’s going to be more important than ever for them to be able to say, 'we’ve isolated these risks'.

You need to see what other connected risks there are and VaR helps you understand the risk in the entire value chain, not just one node. So, I expect supply chain leaders to increasingly use VaR as a way to prioritise their risk management resources and make decisions on mitigation.