MIT CTL Deputy Director Jim Rice wrote an article in Harvard Business Review along with Federico Caniato and Antonella Moretto of the School of Management of Politecnico di Milano.
High-profile bankruptcies, refinancing deals, and drastic cost-cutting involving the likes of Brooks Brothers, JCPenney, Hertz, Neiman Marcus, Ford, and GM are testament to the financial distress wrought by the Covid-19 pandemic. But a less visible crisis deep within supply chains is destabilizing small and medium-sized enterprises (SMEs) and could add to the woes of the global economy.
SMEs tend to be the first to feel the effects of financial crises. But their current plight is exacerbated by punitive payment terms that large companies began introducing in the aftermath of the 2008 financial meltdown. These practices, in combination with the pandemic crisis, have starved countless SME suppliers of working capital and threaten to trigger a tidal wave of failures.
There are ways to avoid this outcome. Governments should provide financial support geared to the needs of SMEs, and large companies can assist by identifying and supporting suppliers at risk. SMEs can help themselves through a more rigorous approach to managing their working capital. And innovative supply-chain-finance solutions, including a new generation of digital solutions, can play a key role in providing sources of credit for SMEs. These solutions must be applied as soon as possible. If SMEs fail en masse, the ripple effects will hit larger companies and could further compromise a global financial system already stressed by the pandemic.