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Credit terms continue to disrupt supplier cash flows, slowing productivity, writes Edwin Lopez for Supply Chain Drive. 

Dive Brief:

  • Productivity has dropped during the past ten years, despite economic recovery and low unemployment, The Wall Street Journal reported Tuesday. Recent research, however, suggests that it's due to a credit shortage at numerous companies that followed the financial crisis.
  • Because credit shortages often result in cutbacks in Research and Development (R&D) which limits worker productivity, many companies and their employees are enduring status, leaving wages commensurate with productivity.
  • Signs of improvement are evident in increased corporate debt ratios; however, high debt to earnings could result in limited risk resilience in case of another downturn.

Dive Insight:

The economy may have recovered, but the effects of the 2008 global financial crisis are still being felt across the supply chain. Research, hiring, and operations slow when credit tightens, but terms of payments may extend.

Banks' unwillingness to loan during the recession hindered companies large and small from securing funding during large disruptions. As a result, in order to secure the necessary "safety stock" of cash, large companies gradually extended terms of payments in their contracts with suppliers to pay more, but less frequently.

While this was a recession tactic, not all companies have reverted to shorter terms, which continues to disrupt supplier cash flows. Suppliers waiting for payments must often extend their budgets, which could impact its employees and their families.

The issue remains prevalent to date, straining supplier and buyer relations so much that the market surrounding credit risk and short-term financing is growing. In the past year, notable players like Amazon, Maersk and Foxconn began offering partners direct financing options.

Top image credit: pixabay