SA procurement should share the US's concern about interest rate risks

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SmartProcurement.jpgTalk of interest rate hikes in the United States has got some of that country’s procurement professionals worried. However, if figures like 25 basis points are keeping them awake at night, should South African procurement be proportionately more worried to the tune of 200-300 basis points?

SA rates have increased 125 points in the past year, with another increase of 25 to 50 basis points forecast for July or September. Even with further increases, rates are still below SA’s historical averages. Can your supply chain absorb the effects that an increased interest rate will have on procurement activity and supply chain financing?

Why they worry about interest rates (and maybe you should, too)

In assessing the affects of higher interest rates Bill Michels CEO and founder of Aripart Consulting, in a LinkedIn post, questioned the effects of reduced loan availability a few years ago, and the rise of extended payment terms – which stretched from 90 to 180 days in some industries. These extended terms have fuelled a booming ‘factoring’ market where suppliers sell their receivables, to maintain cash flow, at discounts higher than loan interest rates. Not only is the sustainability of this practice in question, but it becomes difficult for a company to compute true days-sales-outstanding, said Michels.

Can a supplier who factors or a buyer who relies on liquidity calculations as part of risk management really know where a company stands?

Higher interest rates will not help a company stop this sell-receivables-today-to-fund-new-sales-production cycle.While the interest rate hike will not be a surprise, the market change from a buyer’s market to a seller’s market may catch some procurement and supply chain professionals by surprise, many of whom have not lived through periods of inflation and increasing prices.

We have become comfortable with low-cost money and when that cost is increased, it will have a serious affect on low-margin, high-volume suppliers who are essentially financing the supply chain for the end customers. Labour costs will likely be affected as the cost of credit cards, hard goods, homes and automobiles carry the increased interest rate cost to the consumer and workers will look for higher wages.

While Michels hopes that the interest rate effect is minimal, the rand’s currency strength provides the greatest risk to the inflation outlook and interest rate trajectory. The rand is vulnerable to further depreciation, potentially far beyond the South African Reserve Bank’s forecasts of relatively modest declines.

Michels advises that you complete a financial risk assessment of your supply chain, dust off cost containment processes, re-train your team and review all your contracts.

In times of uncertainty, its always best to drive a proactive approach.

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