Virus in the Supply Chain

The shine is being tarnished on the global supply chain as a working capital crisis hits smaller suppliers deep in the chain.

Regardless of the industry, all companies have a network of suppliers that provide the products and services they need to stay in business.  Some of these are very small suppliers running extremely lean operations and “living paycheck to paycheck” with very little cushion to absorb economic blows to their business.

A recent HBR article describes the cash crunch that many small suppliers are experiencing due to pandemic-caused shutdowns, sinking demand and higher inventories, and slowly-paid (or unpaid) invoices.  All of this has come on top of tightened lending standards put in place after the 2008 financial crisis that has severely limited many small companies’ access to capital, pushing them to the edge of a cash-cliff.

The authors suggest several ways smaller suppliers can be supported and the global supply chain strengthened including:

  1. Governments can drive additional cash into the system (e.g., the Paycheck Protection Program) with conditions in place that direct that cash to smaller companies.
  2. Suppliers need to develop the skills to reduce the three main elements of working capital and convert them to needed cash: accounts receivables, inventory, and accounts payable.
  3. Customers can offer small suppliers early cash payments in exchange for price discounts.
  4. Larger suppliers and customers and even 3rd-party FinTech companies can assist smaller suppliers by buying their accounts receivables to make cash available sooner.

Loans can be offered to smaller suppliers based on the inventory that they carry.