The virus pandemic obviously is causing demand and supply disruptions for many companies, but smaller and medium size suppliers are especially at risk, a recent article in the on-line version of the Harvard Business Review.
The impact of small supplier failures could "add to the woes of the global economy," say Federico Caniato and Antonella Moretto, of the School of Management of Politecnico di Milano and the Supply Chain Finance Observatory, and James Rice, of MIT's Center for Transportation & Logistics.
Supply Chain Digest Says... |
 |
| This solution has many variations, but the core benefit is leveraging the creditworthiness of the party with the better rating, providing credit at more attractive rates for the SMEs. |
 |
What do you say? |
| Click here to send us your comments |
 |
| Click here to see reader feedback |
|
|
A key issue, the author say, is that the current business challenges small suppliers face come after changes many companies made in terms of paying suppliers during the deep 2008-09 recession. A study soon to be published by these authors, for example, found that found that large firms are systematically extending their payment terms to tier 1 suppliers, and these supplier firms did the same to their suppliers.
"Unfortunately, the buck stops at SMEs, which do not have the power to force payment extensions on their suppliers," the authors note. "Consequently, for a number of years, SMEs have had to absorb the cost of punitive payments practices to finance their receivables just to stay in business."
"These practices, in combination with the pandemic crisis, have starved countless SME suppliers of working capital and threaten to trigger a tidal wave of failures," the authors say.
But such a grim future state can be avoided, Caniato, Moretto, and Rice observe.
More specifically, the authors say governments should provide financial support geared to the needs of SMEs. At the same time, large companies need to identify and support suppliers at risk. SMEs can help themselves through a more rigorous approach to managing their working capital.
Caniato, Moretto, and Rice have a number of recommendations for companies to address the current status quo.
Nurture Suppliers: Companies should identify critical small and medium suppliers and protect them through the current crisis and the restart of their operations, the authors say. This can be accomplished by paying them earlier than usual, paying for future orders, or using supply chain finance programs to ease credit restrictions on suppliers.
(See More Below)
|
CATEGORY SPONSOR: SOFTEON |
|
|
| |
|
|
Pursue Proactive Working Capital Management: The authors say companies should focus on aggressively reducing all three components of working capital: inventory, payables, and receivables. To reduce inventory, firms should revisit their supply chains and reduce inventory requirements and their cycle time.
 The author's research found that there was no meaningful change in inventory levels after the global financial crisis, which implies that large companies depended mainly on extending payables and speeding collections to reduce working capital, with less attention on operational improvement.
Consider Supply Chain Finance Solutions: The concept here is to allow financial weaker suppliers to get access to credit. The most common technique, the authors say, is called "reverse factoring." That entails a large company with strong credit arranging for its financial institution to buy the receivables of its suppliers. The financial institution can then pay the supplier immediately (less a discount based on the buyer's credit rating) while the buyer pays the bank with the usual payment terms.
"This solution has many variations, but the core benefit is leveraging the creditworthiness of the party with the better rating, providing credit at more attractive rates for the SMEs," the authors say.
Of course, companies should consider these and other steps to keep smaller suppliers viable not out of altruism but to protect their own supplier chains, where loss of even smaller provider providing critical components for finished products impact a company's production.
"Today, [small] companies are struggling to stay alive until orders rebound or ramp up or expand operations," Caniato, Moretto, and Rice conclude. "These challenges require liquidity throughout the supply chain. The approaches we've described will make large firms and their supply chains more resilient."
The full HBR article can be found here: A Financial Crisis Is Looming for Smaller Suppliers
Any reaction to these ideas for protecting small suppliers? Let us know your thoughts at the Feedback section below.
Your Comments/Feedback
|
