Great Recession + Pandemic = Trouble for Smaller Suppliers
Beleaguered small and medium-sized suppliers could face a “tidal wave of failures.” (iStock/Andrei Stanescu)
Big companies make headlines when they run into financial trouble. But small and medium-sized enterprises (SME), many still feeling the hangover of the Great Recession, face their own challenges. While not often front-page business news, their struggles can have serious repercussions for the greater economy.
“SMEs tend to be the first to feel the effects of financial crises,” notes a new article in the Harvard Business Review. “But their current plight is exacerbated by punitive payment terms that large companies began introducing in the aftermath of the 2008 financial meltdown. These practices, in combination with the pandemic crisis, have starved countless SME suppliers of working capital and threaten to trigger a tidal wave of failures.”
Avoiding a supply chain and financial tsunami will require the participation of government entities, large companies and the SMEs themselves, and the use of “innovative supply chain-finance solutions,” according to the HBR article. Here are the roles the authors envision for stakeholders:
- Governments — The public sector can help by writing some checks, according to HBR, citing the Payroll Protection Program (PPP) as a recent example. However, the success of these efforts depends on how quickly and efficiently the money can be distributed.
- Large firms — These companies might have the biggest roles to play, and the article suggests they consider several strategies. They include identifying and helping critical suppliers, such as by paying them earlier than normal; aggressively reducing all three components of working capital (inventory, payables and receivables); and supply chain-finance solutions such as reverse factoring.
HBR added that large organizations should make better use of data to monitor suppliers’ health and viability, take advantage of digital solutions and apply novel financing solutions.
“These solutions must be applied as soon as possible,” the authors warned. “If SMEs fail en masse, the ripple effects will hit larger companies and could further compromise a global financial system already stressed by the pandemic.”