The latest U.S. employment report seems to have given the Federal Reserve a strong signal to bump interest rates after it failed to do so in September. Employment increased by 211,000 people following a gain of 298,000 in October that was bigger than previously estimated, easing concerns that manufacturing activity is slowing.
While the interest rate increase is expected to be modest, it will have an impact on procurement activity and supply chain finance. Before looking at the impact of raised interest rates, let’s look at the impact of reduced loan availability a few years ago and extended payment terms–stretched from 90 to 180 days in some industries. These extended terms have fueled a booming factoring market where suppliers sell their receivables at discounts that are far higher than loan interest rates to maintain cash flow. Not only is the sustainability of this practice in question, but it becomes difficult for a company to compute true days sales outstanding. So, can the supplier who factors or the buyer who relies on liquidity calculations as part of risk management really know where the company stands? Higher interest rates will not help a company stop this sell-receivables-today-to-fund-new-sales-production cycle.
We have become comfortable with low cost money and when that cost is increased, it will have a serious impact on low margin, high volume suppliers who are essentially financing the supply chain for the end customers. Labor costs will likely be impacted as the cost of credit cards, hard goods, homes and automobiles carry the increased interest rate cost to the consumer and workers will look for higher wages.
While the interest rate hike will not be a surprise, the market change from a buyer’s market to a seller’s market may catch some procurement and supply chain professionals by surprise, who in many have not lived through periods of inflation and increasing prices.
While I hope that the impact is minimal, I am advising all of my clients to complete a financial risk assessment of their supply chain, dust off cost containment processes, retrain their teams and review all contracts.
In times of uncertainty, its always best to drive a proactive approach.