There must have been a lot of stiff necks on Wall Street last week as traders and business executives looked down, then up, then down again, then up again in sync with the constant rising and falling of stock prices after the Standard & Poor’s downgrading of US credit. The figurative neck-craning scene on the trading floor was a vertical version of that in a tennis match, where spectators continually turn their heads left and right to follow the volleys. So much for hopes of a clear sign from the stock market on the US economic outlook.
Well, actually there was one clear sign, and it was in the sky above S&P’s Manhattan headquarters. A plane, hired by a single mom who is also an investment banker, towed a banner with the words, “Thanks for the downgrade. You all should be fired.” She should be hired for her penetrating analysis of a credit agency that missed problems at Enron, Lehman Brothers, and billions of dollars in mortgage securities.
Meanwhile, procurement executives last week were looking neither up nor down, but straight ahead into the future as they pondered how to avoid dizziness and disorientation in their supply chains from the week’s events. They weren’t the only ones. The Association For Financial Professionals said last week that two out of five finance executives expect debt financing and bank credit to become more expensive or harder to secure. The only surprise is that it’s only two out of five.
Whatever the direct consequences of the downgrade, says Lamar Chesney, CPO of SunTrust Banks, procurement executives need to be mindful of the indirect implications, such as access to finance, the implications for energy costs, and greater contractual flexibility. “Those implications may rise over the near term and dissipate as uncertainty migrates back to confidence,” he says.
Nevertheless, given the expected near-term financing problems suppliers will face, Rose Kelly-Falls, senior vice president for supply chain risk management for Rapid Ratings, advises a deep dive into suppliers’ financial health. She says procurement needs to look beyond suppliers’ share price and market indicators to get a handle on their finances. The former head of commodities purchasing at Rolls Royce North America, Kelly-Falls says working-capital efficiency, cost structure, debt service management, sales performance, leveraging, and overall profitability will provide a deep understanding of where a company is falling short and where performance is strong.
She also has another suggestion that I think is particularly appropriate now: Collaborate with suppliers and help them if they need help.
Leaders in procurement have always believed in that philosophy. Indeed, procurement teams at companies from American Airlines to Glaxo Smith Kline to IBM to Procter & Gamble have found ways in the past to help important suppliers through hard times. Some companies have even helped key suppliers get financing.
But there may be simpler ways to help too. For example, don’t reflexively extend payment terms unilaterally without regard to contracts. More sophisticated procurement staffs work with their finance organizations to make the optimal tradeoffs between prompt payment and extended terms. They should factor in the effects of prompt payment discounts, the cost of capital, and delayed pricing increases, says Steve Nied, vice president of strategic sourcing and operational excellence at Wolters Kluwer.
That kind of collaboration, internally and externally, may help relieve everyone’s headaches and stiff necks.
Paul Teague is US contributing editor of Procurement Leaders. To dind out more about the magazine, click here.