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Mitigating the supply chain risk of rising interest rates

Rising interest rates putting pressure on procurement

Rising interest rates are synonymous with higher mortgage repayments and improved returns on savings. But what impact will they have on businesses, and, more specifically, their supply chains?

 

At the end of 2017, the Bank of England, the UK’s central bank, increased its base rate for the first time in a decade. Although the rise itself was fairly modest, from 0.25% to 0.5%, the bank’s decision could cause the cost of capital to increase, which will have a knock-on effect on supply chains.

 

Not only will this directly increase cost pressures for firms borrowing money, there will certainly be moves by suppliers to try and pass increased capital costs to buyers.

 

So, how can CPOs prepare their functions for these challenges ahead?

 

The critical first step is to assess current arrangements, reviewing both pipelines and priorities to identify potential risk areas and build contingency plans.

 

Smaller firms, companies in low-margin industries and exporters will face the biggest risks. For such businesses, the main challenge is accessing funds, as they typically don’t have easy access to vast pools of capital. Accessing a loan is hard enough at the best of times, let alone securing one at a competitive rate. For these businesses, it becomes more important than ever to exercise care when looking for finance options to try and solve any cash flow issues. In an environment of rising rates, a decision taken in the short term could come at a detrimental cost in the long term.

 

Low-margin businesses will be fighting to keep profits up. As the cost of rising rates starts to bite, it will challenge these slender margins even further, so advance planning should be a priority here. By determining in advance what, if any, adjustments can be made within supply chains, either in the form of changing the terms of business, consolidating or entirely changing suppliers, as well as looking at options to increase product prices, procurement teams will be better placed to forecast the impact and react accordingly.

 

Larger firms, of course, have greater capital options. But they still cannot escape the hit of rising rates. Some suppliers will doubtless increase their prices to account for the higher cost of capital. This is another area in which planning is essential. Procurement teams must be able to identify where these increased costs may come from, how they will affect the overall economics of the business, and the options available, be it seeking different payment terms or new suppliers.

 

At a recent roundtable, we discussed the impact of rising rates and explored the options businesses are considering here.

 

Paul Alexander, regional head of indirect procurement for EMEA at BP said: “Rising interest rates compound the need to do the things procurement should excel at. Category management and interpretation of the consequences are essential.”

 

But, for Diane Wilson, head of procurement at London’s Great Ormond Street Hospital, rising rates actually present opportunities: “Rising rates generally strengthens sterling. With around 80% of healthcare products (non-pharmaceutical) being imported, rising rates could result in opportunities to reduce cost pressures in the National Health Service.”

 

Steering a smooth course through such a tricky period does present an opportunity for procurement chiefs to show how much value the funcion offers, but it is also a time to assess and mitigate risk.

 

Alejandro Alvarez, Director of Operations Performance at Ayming

 

This contributed article has been written by a guest writer at the invitation of Procurement Leaders.

Alejandro Alvarez
Posted by Alejandro Alvarez

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