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Resources » Blog » Forget Interest Rates, Focus on What You Can Control




FORGET INTEREST RATES, FOCUS ON WHAT YOU CAN CONTROL





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tags: Supply Chain Finance

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By Brian Medley • 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.




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