Financial Strain on Small Suppliers Worsens Post-Pandemic

A smaller supplier within a supply chain arriving to make a delivery.

An analysis by RapidRatings reveals a stark contrast in the financial health of small to mid-sized suppliers compared to their larger counterparts, with operational efficiency taking a hit due to pressures from big buyers.

Supply Chain Undercurrents: Small Suppliers Bear the Brunt

While large corporations have seen a rebound in supply chain stability and profitability, the financial health of smaller suppliers has deteriorated since the pre-pandemic period. Research by RapidRatings for Marblegate Asset Management indicates that private middle market companies, crucial to supply chain infrastructure, have experienced a bankruptcy rate up to four times higher than that of larger firms since 2019.

EBITDA Disparities Highlighted

The analysis shows a concerning trend: a decline in EBITDA of over 20% for middle market companies from 2019 through 2022, while large public companies enjoyed a 20% increase. This decline is evident across several industries, with aerospace and defense private companies seeing a nearly 29% drop in Core Health Scores (CHS), which assess over 60 financial ratios to gauge operating and structural efficiency.

Downstream Pressures and Operational Challenges

The financial strain on smaller suppliers is partly due to the pressures exerted by larger downstream buyers. These pressures manifest in day-to-day operations, with suppliers facing challenges such as reduced visibility into customer demand and shortened lead times for SKU setup. In some cases, large retailers have transferred operational and financial risks downstream, with instances of order cancellations and aggressive price negotiations reported by suppliers like apparel manufacturers in Bangladesh.

Navigating Financial Headwinds

The financial landscape is also contributing to the difficulties faced by supply chain participants. Suppliers grapple with financing challenges, the need for innovation, and investor pressures. Large public companies, with their more robust financial resources and borrowing power, have managed to navigate the post-pandemic environment more successfully.

The Ripple Effect of Supplier Distress

When suppliers succumb to financial pressures, it can disrupt the entire supply chain. As noted by Everstream in a 2023 report, the closure of small businesses can have a bullwhip effect, potentially halting production. To mitigate risk, buyers must manage supplier relationships effectively, fostering collaboration and support through measures like improved payment terms and financial assistance.

Collaboration as a Cornerstone for Resilience

The key to a resilient supply chain lies in the strength of the relationships between corporate entities. Mature companies that support their suppliers financially and collaboratively are more likely to maintain robust supply chains, underscoring the importance of building strong partnerships.

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