Ever since launching our online two-course series “Finance For Strategic Procurement,” I’ve had many practitioners approach me about the topic and its importance in today’s modern procurement world. This week, I separately met with executives at two totally unrelated companies who learned from me that they were making the same mistake.

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What was that mistake?

Well, it relates to the evaluation of supplier financial health. I introduced them to four methods of evaluating supplier financial health. One of those methods involved using the Altman Z-Score.

Have you ever heard the phrase “I know enough about it to be dangerous?”

Well, that applied in both of these situations.

You see, the Altman Z-Score calculation has three variations: one used for publicly-held manufacturers, one used for privately-held manufacturers, and one used for non-manufacturers. Each Z-Score calculation is performed using slightly different coefficients and variables to arrive at a number used to compare against a scale that determines the financial health of the supplier.

Well, not only is the calculation different for each of the different variations, but the scale against which a supplier’s Z-Score is compared is different for each variation. So, beyond just using the wrong calculation, by using the wrong variation, you could be getting a totally opposite reading on the financial health of a supplier! (Advair diskus)

For example, let’s say you calculated the Z-Score for a publicly-held manufacturer as 1.7. But let’s also say that you used the comparison scale of the variation for non-manufacturers.

The comparison scale of the variation for non-manufacturers indicates that a 1.7 puts the supplier right in the middle of the “grey zone.” This means that there is not a severe likelihood of imminent bankruptcy.

But what does the comparison scale for the publicly-held manufacturer variation – the correct variation, in this case – say?

It says that a score of 1.7 puts the supplier in the lowest category, meaning bankruptcy has a high likelihood. If you don’t apply the right variation to the type of supplier you are evaluating, the Altman Z-Score will not work!

Obviously, Finance For Strategic Procurement (Part II, specifically) covers how to correctly apply the Altman Z-Score for each type of supplier. Though I know that not enough procurement professionals utilize the excellent tool that the Altman Z-Score is, I didn’t realize that applying the wrong variation appears to be a very common mistake among those that do attempt to utilize it.

Perhaps that’s what happens when googling is used instead of getting authoritative purchasing training: learning enough to be dangerous. And, make no mistake, miscategorizing a healthy supplier as a financially distressed supplier or failing to recognize a supplier’s impending bankruptcy are both dangerous procurement mistakes.

“Epic fail” kind of mistakes.