Supply Excellence — Credit Crunch: Is it a Risk to your Supply Chain?

Credit Crunch: Is it a Risk to your Supply Chain?

April 3rd, 2008 · by Drew Hofler · No Comments · best practices, supply management, supply risk

News of the credit crunch has been unavoidable in recent months. Hopefully your business (and home mortgage) have been spared and you’re in a position to weather the storm. But what about your suppliers? If they’re having any credit/cash flow problems, that’s a huge risk to your supply chain. And buyers’ companies may be unwittingly contributing to the problem and injecting unnecessary risk into their own supply chain.

You see, suppliers - especially relatively small ones - are being hit hard by the credit crunch. In fact over half of small businesses in a recent online poll claimed the credit crunch had already impacted their business. Sure some of them simply had poor business plans, products or rainy day funds. But others are struggling with liquidity problems caused by late payments from their buyers, some of which are deliberate (and sometimes savvy) attempts to gain extra cash by floating the payment for an extra week or two.

But are the small gains you get by floating your cash (~2.25% in the current short term rate environment) worth adding risk to your core business and potentially interrupting you supply chain? Obviously not, as any supply chain interruptions could cost you far more in production delays, lost sales and a potential open door to your competition. But that doesn’t mean you have to concede all the hard earned gains your business has been adding to the bottom line through smart money management.

There are options available to fund early payment to your supply base, either in exchange for significant discounts (Dynamic Discounting) or to enable you to hold onto your cash while still removing risk from your supply chain (3rd party financing). Given that such early payment to suppliers is not debt, and can come a a lower cost than a supplier’s alternative cost of financing, it can truly be a win-win situation that reduces risks, saves money and acts as a stabilizing influence on the supply chain in otherwise turbulent times.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.

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