Question

The American Association of Individual Investors (AAII) has identified several qualitative factors that should also be considered when evaluating a company’s likely future financial performance. Consider the scenario and indicate how you would expect the described event or situation to affect the described business organization.

Southern Supply Inc.

The Purchasing Policy Guidelines of the Southern Supply Inc. indicate that the company is committed to procuring its goods, products, and services from a diversified pool of vendors, contractors, and service providers.

Despite these guidelines, Southern’s purchasing manager prefers to maintain a small cadre of suppliers that he knows and trusts.

How would you expect this situation to affect the assessment of Southern’s financial condition and performance?

Although nonquantitative factors may be relevant to a company’s financial evaluation in general terms, the details of this specific situation are not relevant to the firm’s financial condition or performance.

The purchasing manager’s behavior should be expected to decrease Southern’s riskiness. His belief that the use of trusted suppliers will prevent or eliminate any inventory or supply delays or outages is, no doubt, correct.

The purchasing manager’s behavior should be expected to increase Southern’s riskiness by increasing its exposure to potential supply shortages or mistimed deliveries.

Answer 1

Trust in business is an extremely tricky sentiment. It is based on the mutual satisfaction of involved parties, and the perceived longevity of their relationship. There may be a dark side to it - in terms of "corruption/bribery", "favouritism", "nepotism" etc. which may lead to "a taken for granted, biased attitude" and eventually compromise "quality" - adversely affecting the business' success.

Now, given this idea, you might appreciate why Southern Supply Inc. had a purchasing policy of procuring its products/services from a diversified pool of service providers. It is exactly as the popular saying goes - "One-should-not-put-all-their-eggs-into-one-basket"

The answer is the last option - "The-purchasing-manager’s-behavior-should-be-expected-to-increase-Southern’s-riskiness-by-increasing-its-exposure-to-potential-supply-shortages-or-mistimed-deliveries"