A proverb is recited in developing countries to describe how dependent their economies are on the United States: “When the U.S. sneezes, the world catches a cold.” Procurement and supply chain managers should take that adage seriously for the next year to 18 months, given the prospects of a recession in the United States.
Inflation is already causing U.S. consumer demand to decline in many sectors and sending a bullwhip upstream to suppliers, with 20-30% PO reductions reported by Chinese manufacturers. If a recession takes hold, count on those impacts on supplier firms to continue and intensify. In the 2008-2009 recession, export-dependent countries in Asia suffered a 15% drop in GDP in Q4 2008 due to their dependence on export markets, according to IMF analyses. (China suffered only briefly, returning to 8.7% growth in 2009 thanks to its enormous financial stimulus package).
The financial pressures on suppliers in a recession could cause important links in supply chains to become brittle or even break. Supplier firms are already contending with higher interest rates and rising costs for energy and many commodities. Add a recession to the mix, and many will be pushed toward bankruptcy.
These kinds of disruptions loomed in the early months of the pandemic, due to the precipitous destruction of demand across virtually all sectors—except for healthcare, where demand outstripped supply for PPE, ventilators, and some medicines. With stimulus policies, the worst damage to supply chains was averted—and followed by supply shortages as demand rebounded in ways that defied forecasts. But it’s important to remember that, as reported by Resilinc CEO Bindiya Vakil and co-author Tom Linton in Harvard Business Review, actions by large OEMs also played roles in helping endangered supplier firms make it through the first months of the pandemic.
Resilinc advises that supply chain managers consider the next 12 to 18 months to be a period of high financial risk for suppliers. Accordingly, supply chain managers and CPOs should initiate assessments of the financial status of key suppliers—including those in their tiers below direct suppliers. Priority should be placed on firms the OEM relies upon for its high-revenue Solutions. This group will include firms supplying items as prosaic as packaging, sheet metal, and hardware.
Many direct suppliers are publicly held firms whose financial data can be accessed easily, but in many cases, a frank conversation between OEM’s senior executives and their counterparts at such firms will provide additional insights. For the privately held firms that constitute the vast majority of suppliers, OEMs should work with their contacts to understand the firm’s financial condition and consider using third-party analysts such as Resilinc partner Rapid Ratings.
For a deeper dive into this please register for our upcoming webinar with Rapid Ratings: How to Build a Resilient Supply Chain When Facing a Global Recession
While the measures an OEM may take to aid a financially strapped supplier will vary by industry and other characteristics, here are some rules of thumb drawn from Resilinc’s vast experience working with OEM customers in a wide range of industries:
- For large-spend suppliers: Place orders in advance so suppliers can borrow against receivables.
- For medium-spend suppliers: Pay upfront or on delivery; place orders in advance; consider taking an equity stake in the firm.
- Low-spend suppliers: Extend credit; pay upfront or early; where possible, relax service-level agreements.
Supply chains are ecosystems where the loss of a small- or medium-sized organism can ripple out to cause significant losses for OEMs. With this in mind, large OEMs should act to identify the important parts of their ecosystems that are threatened and consider financial stimuli to keep those suppliers afloat.