Forget Interest Rates, Focus on What You Can Control
By • Published August 30, 2023 • 5 minute read
There’s been a lot of talk about interest rates. They’re up (again) and it’s likely we will see future increases until a bit more pain is inflicted. Meanwhile, a clearer – or shall we say “less murky” – picture of how the global economy will fare heading into 2024 is starting to emerge.
In the UK and Europe, the economy is sputtering along. The U.S. is doing a bit better and it’s expected it will experience a soft landing versus a recession. The forecast in Asia looks bleaker amid growing concerns, particularly in China.
Are there any surprises here? Not really. For the last two years, talk about the economy has sounded like a broken record. Interest rates. Inflation. Recession or no recession. Repeat. Yes, these are all legitimate indicators of supply chain health and where we’re heading. But they are not the only barometers – not by a long shot.
Modernizing the Liquidity Toolbox for Focus and Efficiency
The financial health of a supply chain is best measured by the cash conversion cycle. Measured in days, it indicates how much time a company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills. A lower number suggests efficient use of cash in the supply chain as it indicates the company has balanced the time it takes to bring cash into the business against the time it has cash tied up in the production or sale of goods.
Unfortunately, the toolbox for how companies can improve the cash conversion cycle (and therefore inject liquidity throughout the supply chain) is somewhat limited. Depending on a business’s credit rating, commercial lending can be expensive and has obvious limitations. Other areas of focus like demand generation, inventory optimization and expense reduction are effective, but the runway is long.
Companies need a better, faster way to buffer the economic impact of the three I’s –
indefiniteness, inflation, and interest rates – across their supply chains. They also need to focus on strategies that impact what they can actually control. A large multi-national manufacturer can’t control the credit ratings of their suppliers. But they can ensure that those suppliers have access to affordable, efficient capital. Likewise, suppliers have little control over a buyer’s decision or need to extend payment terms. They can, however, choose to participate in early payment programs that accelerate their cash flow and reduce their reliance on expensive and uncertain lending options.
Supply Chain Finance in Action
Early payment options like supply chain finance are a sustainable, effective way to infuse liquidity across the supply chain. It’s also equitable in that it can be offered to suppliers of all sizes. By fortifying cash flow up and down the supply chain, companies can create supply chains that are resilient enough to withstand economic volatility.
Here are a few examples of how some of the world’s best companies have partnered with PrimeRevenue to increase supply chain resilience:
- Volvo used supply chain finance to fortify its supply chain by providing suppliers an additional liquidity option during the pandemic and continues to use supply chain finance to support ESG goals across their global supply chain.
- Amid historic economic uncertainty, Genuine Parts Company gave suppliers access to early payment so they could stabilize financial health and cash flow. This allowed GPC the financial flexibility to competitively navigate industry disruption.
- Michelin used $1B in free cash flow to launch an ambitious, supply chain-wide initiative to reinforce its position as a global innovation leader.
One thing all these companies have in common is their willingness to explore liquidity options outside of the conventional toolbox. Waiting for suppliers to shore up capital on their own wasn’t the answer and didn’t support the partnership they had with their suppliers. By focusing on what they could control – in this case, the way in which liquidity was infused across the supply chain – these companies were able to thrive and enable their suppliers to do the same regardless of the economic and supply challenges they faced.
