For the first time in nearly a decade, the Federal Reserve has raised interest rates. This signals the end of the extraordinary Fed policy of zero interest rates implemented in response to the Global Financial Crisis. While the increase itself was expectedly small, it signals the next phase of the recovery and a directional bias towards higher rates going forward.
The rate increase had been anticipated for some time, so there is an element of relief in actually having it occur. The question many companies are asking is how the hike will affect their suppliers.
Implications of the Rate Hike on Suppliers
An interest rate hike has far-reaching implications for nearly all companies. One of the more significant impacts will be within the global supply chain.
Over the past handful of years, companies of all credit qualities have been able to raise capital relatively easily. With rates so low, many institutional investors were prepared to take greater risks (investing in less healthy companies) in order to seek out a little more yield. As rates move up during this new economic period, so will the cost of capital. The hike will make financing (and refinancing) harder, inevitably making it more costly for suppliers to run their businesses. As bank lines and outstanding bonds become harder to refinance at favorable rates, healthier suppliers may look to pass their increased costs on to customers and less healthy suppliers may become distressed or fail.
Significance of Evaluating Financial Health
As rates rise again, investors will begin to look for more credit differentiation and the weaker companies will have a harder time raising the money they need to grow their businesses, or to refinance the bank lines or bonds they issued in less discriminating times.
When you combine this dynamic with the market volatility that has begun to creep in from low commodity prices and a more circumspect stock market, we’re likely to see more bankruptcies and defaults. These will test your supply chain.
More than ever before, the financial health of suppliers is critically important. Companies must know which suppliers are financially healthy and which suppliers may be at risk of default. A Financial Health Rating (FHR®) can provide early warnings of instability that could put your business at risk of disruption. Understanding suppliers’ financial health will also help companies take advantage of supplier strengths, or initiate risk mitigation strategies as needed.
3 Strategies to Better Manage Supplier Risks
- Conduct a thorough risk assessment: By better understanding the various risks faced by their organization, organizations can adjust supplier strategies and customer demands to support ongoing and continuous risk assessment.
- Develop risk metrics: Create key risk indicators (KRIs), gain visibility into enterprise-wide risk data to alert the organization into potential problems affecting global supply chain.
- Strive for supply chain resiliency: Shift organizational focus from reactive to proactive risk management and build a resilience framework to manage them.