As Interest Rates Rise, So Will Supply Chain’s Financial Stock

As Interest Rates Rise, So Will Supply Chain’s Financial Stock

Will supply chain's financial stock rise with increasing interest rates?
Companes need to leverage supply chain management’s capital management capabilities

Guessing how markets will react when the widely expected hike in short-term interest rates occurs later this year is a popular game in the corporate and financial worlds. An implication that supply chain professionals might want to think about is how they will respond as the low-interest rate regime comes to an end, and companies take a closer look at their capital management practices.

MIT CTL’s Jarrod Goentzel and James B. Rice Jr. offered some thoughts in a recent Guest Voice Wall Street Journal column titled Managing Supply Chains is Intertwined With Financial Management.

It’s an area where supply chain management is under-utilized, they suggest. And as interest rates rise and markets become less tolerant of careless capital managers, companies may pay a high price for failing to make full use of supply chain’s financial acumen.

Moreover, some companies have become lackadaisical in their approach to managing capital resources. A study recently published by consulting firm REL, a division of The Hackett Group Inc., suggests that complacency has overtaken some companies in the low-interest rate regime that has prevailed since the 2008 financial meltdown.

REL looked at almost 1,000 of the largest public companies in the U.S. and concluded that “companies continue to take on alarming amounts of debt.” The study found that debt among those companies increased by more than 9% in 2014 to nearly $4.6 trillion. Companies leveraged low interest rates to fund their investments, said REL.

At the same time, “companies once again made almost no improvement in working capital management, doing little to generate cash internally by optimizing how they collect from customers, pay suppliers, and manage inventory.”

Supply chain management plays a key role in each of the three core areas highlighted by the REL study.  For example, the function can support programs that extend supplier payment terms in exchange for high-volume commitments or structure incentives for early payments from customers. Proactively managing programs like these can reduce both working capital requirements and operational uncertainty.

The authors suggest ways which enterprises can plug the supply chain function into capital management programs. Senior executives need to be aware of the supply chain’s financial impact, and work diligently to integrate operations managers into cross-functional roles to leverage their expertise. Supply chain executives should engage with the larger organization and become proactive capital managers.

More specifically, supply chain practitioners need to understand how their decisions affect the company’s financial health. That requires a firm grasp of the connection between operations and important financial statements such as the balance sheet and income statement.

Becoming more financially fluent helps operations professionals communicate more effectively with senior executives, notably CFOs. Selling projects to corporate leaders who are not familiar with the supply chain function is easier when everyone is speaking the language of finance.

Financial fluency can also be a career booster. The authors have been teaching an MIT CTL graduate-level course on supply chain finance for some years, and students have reported that the knowledge they gained from the course has helped their performance during job interviews. And later on, they are more effective employees because they understand the connection between supply chain and finance and how the combination affects business performance.

The idea that financial skills enhance the value that supply chain managers bring to an organization is not new. But when interest rates rise, the value of financially-savvy operations professionals will surely grow as well.

MIT CTL will host a Supply Chain Finance Workshop on October 27, 2015, that will show how supply chain actions affect financial statements and how professionals can explain their decisions in the language of finance. To ensure that participants derive as much value as possible from the event, the number of attendees has been capped at 25 people. Get more information about the workshop and register for the event here.

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