Why Supply Chain Managers Can’t Ignore the Risks of Corporate Debt
Supply chain managers must handle a lot of risk, planning for everything from natural disasters to unpredictable demand. However, debt is perhaps one of the biggest problems they need to account for.
In a recent webinar, experts delved into the implications of corporate debt. Many agree that supply chain and procurement professionals need to pay attention to the degree that public companies are leveraged as they are the primary contact point between companies and suppliers as well as a first line of defense when it comes to third-party risk.
According to Dr. Edward Altman of New York University and CreditRiskMonitor CEO and Founder Jerry Flum, three debt-related conditions need to be considered by supply chain managers in order to mitigate risks.
Current Debt Statistics
First of all, they point out that the total U.S. debt is now 3.5 times the GDP, which is a significant amount. Levels of overall debt have now gotten to the point where it’s time to think about not only the borrowers but also the investors who own the debt. A drop in value of just 10 percent would destroy wealth that equals roughly 35 percent of the GDP, and it would also have a significant impact on spending.
It’s also important to keep in mind that corporate valuations are inflated. Market values are now much higher than the historical norms, and private equities are paying around ten times cash flow for their acquisitions. If stock prices fall, the risk of default is significant.
On top of that, we are currently in the eighth year of the current “benign credit cycle” – something that normally lasts around seven years at the most. It’s important not to let your guard down and take on too much debt.
Supply chain professionals need to do all they can to keep supplier risk to a minimum and prepare for the downturn that will accompany any future recessions.
This blog post was based off of an article from Inbound Logistics. View the original here.